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OECD: Proposal to address digital economy tax issues, “Pillar One” approach

OECD: Proposal to address digital economy tax issues

The Organisaton for Economic Cooperation and Development (OECD) today released a proposal to advance international negotiations in an effort to determine that certain “large and highly profitable” multinational enterprises (MNEs)—including digital companies—pay tax wherever they have significant consumer-facing activities and generate their profits.

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As noted in today’s OECD release, the new OECD proposal—Secretariat Proposal for a “Unified Approach" under Pillar One [PDF 525 KB]—brings together common elements of three competing proposals from OECD member countries, and is based on the work of the OECD/G20 Inclusive Framework on base erosion and profit shifting (BEPS), which aligns 134 countries and jurisdictions for multilateral negotiation of international tax rules.

The consultation document describes the “unified approach” to Pillar One as proposed by the OECD Secretariat, and seeks comments from the public on a number of policy issues and technical aspects. The comments provided will assist members of the Inclusive Framework on BEPS in the development of a solution for its final report to the G20 in 2020.

The proposal—now open to public consultation—would:

  • Re-allocate some profits and corresponding taxing rights to countries and jurisdictions where MNEs have their markets
  • Provide that MNEs conducting significant business in places where they do not have a physical presence would be taxed in those jurisdictions, through the creation of new rules providing: (1) where tax is to be paid (nexus rules); and (2) on what portion of profits the MNEs are to be taxed (profit allocation rules)

The Inclusive Framework’s tax work on the digitalisation of the economy is part of broader efforts to restore stability and certainty in the international tax system; to address possible overlaps with existing rules; and to mitigate the risks of double taxation.

Beyond the specific elements on reallocating taxing rights, a second pillar of the work aims to resolve remaining BEPS issues, so that there would be a minimum corporate income tax on MNE profits (to be discussed in a public consultation expected to take place in December 2019).

Read an October 2019 report prepared by KPMG’s EU Tax Centre

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