OECD: “BEPS 2.0” and taxation of digitalised economy, in a nutshell

OECD and “BEPS 2.0”

Over 130 countries are working toward reaching a consensus on reforms to the global tax system in order to deal adequately with the digitalised economy. There is now renewed momentum to achieve a solution by the end of 2020.


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The Organisation for Economic Cooperation and Development (OECD) and G20-sponsored Inclusive Framework of more than 130 countries have been working on two “pillars” of reform.

  • Pillar One concerns addressing nexus issues with a new taxing right or reallocation of taxing rights for countries with which a business has significant consumer interaction, but relatively little physical presence. It also is seeking to resolve issues around complexity and dispute resolution.
  • Pillar Two is the proposal for a “global minimum tax rate on multinational enterprises” (GloBE).

The Inclusive Framework confirmed in a recent statement that it has refined its focus in terms of which industries need to be included in the scope of Pillar One. Among the challenges is that settling the scope of a Pillar One approach requires forming a consensus among countries that want to determine that they retain a reasonable tax base. This means both taxing income that they might not currently be taxing, but also making sure that they do not lose out disproportionately on taxing income from their strongest local industries. Read TaxNewsFlash

Who’s in and who’s out?

The latest indication from the Inclusive Framework is that automated digital services businesses and consumer-facing businesses are to be the focus of the Pillar One solution. Examples of automated digital services businesses include:

  • Online search engines
  • Social media platforms
  • Online intermediation platforms
  • Digital content streaming
  • Online gaming
  • Cloud computing services
  • Online advertising services

Examples of in-scope consumer-facing businesses include:

  • Businesses that sell goods to consumers (directly or indirectly), such as clothes, toiletries, cosmetics and luxury goods, branded foods / refreshments and automobiles
  • Businesses that sell services to consumers (directly or indirectly) such as personal computing services
  • Licensing arrangements under franchise in the restaurant and hotel sector
  • Sales made through third-party resellers or intermediaries when the intermediary only performs routine tasks such as minor assembly and packaging

It has been clarified that intermediate products and components for consumer products would be out of scope, subject to possible exceptions.

Remaining challenges

Challenges remain in determining precisely which businesses will be in-scope. For example, it may often be difficult to draw a dividing line between a downstream business selling consumer goods through an intermediary that only performs minor assembly and packaging, and an upstream business that is only selling components of consumer goods to a business customer that then manufactures the goods.

The Inclusive Framework’s statement identifies at least eight areas requiring further work. One area where more work has been noted concerns:

…the definition of an automated digital service … and on the distinction between such digital service businesses and businesses whose services might be delivered to a customer online but involve a high degree of human intervention and judgement.

This suggests there is still much work to do in the development of this definition, in particular as the digital business landscape of the future is likely to be increasingly capable of facilitating higher-value, personalised services being provided from another country via electronic means.

Additional work is also indicted with regard to the definitions concerning consumer-facing businesses. The potential treatment of businesses that produce consumer products but have varying degrees of consumer-facing dealings are yet to be clearly set out. For example, a manufacturer may produce consumer goods for sale under a “private label” brand by a retailer in another country, in addition to selling goods there under its own brand.

There appears to be an intention to carve out extractive industries, regardless of the extent of their consumer focus. Consumer financial services also have some prospect of being carved out, which would make administrative sense given a regulatory environment which predominantly requires sales of such services to be booked in the jurisdiction where the consumer resides.

The Inclusive Framework has indicated that the operation of ships and aircraft in international traffic would be outside the scope of Pillar One. In those industries, bilateral tax agreements generally have already solved the allocation of taxing rights by providing that such income is to be taxed solely in the carrier’s country of residence.

Will Pillar One end up just being a “safe harbour”?

There are other critical policy issues that must be agreed to under Pillar One before a decision can be taken as to whether Pillar One operates as a definitive set of rules for all in-scope businesses, or whether it operates as a “safe harbour” only. The "safe harbour" issue is included in the list of remaining work, but a final decision will be deferred until the architecture of Pillar One has been agreed upon.

What is next?

The recent OECD releases indicate that the key features of the Pillar One solution will be locked-in by July 2020, with a goal of a final report by the end of 2020 that will set out the technical details of the consensus-based solution agreed by the Inclusive Framework. 

Given the challenge posed by creating “clear and administrable” rules that can achieve multilateral support, the job ahead for the members of the Inclusive Framework remains a big one. What appears to be clear is that the OECD is driving hard to obtain consensus because the alternative pathway of unilateral action would likely result in unproductive consequences for the global community.

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