OECD released yesterday a 3 pager policy note with the proposed way forward on the analysis of the difficult Digitalized economy taxation global issue.
To resolve the fundamental question of how taxing rights on income generated from cross-border activities in digital era should be allocated, the intensified and renewed discussions will focus on two central pillars:
The first pillar will focus on allocation of taxing rights including nexus issues:
- Specific work on how to allocate profit to Active User Contributions,
- how to value Marketing Intangibles created by the market jurisdiction,
- how to determine nexus based on significant economic/digital presence.
The second pillar will focus in addressing other remaining BEPS issues:
- Addressing profit shifting to countries with significantly disparate tax rate, providing residence and source countries a right to “tax-back” profit subject to low rates or where not commensurate substance is placed. Specific tools are described to achieve this, including proposals like the “minimum tax”.
The note confirms the agreement of the inclusive framework members to examine proposals in the 2 pillars with the objective of defining the solution by 2020.
The paper openly recognizes straight basis that “all” Pillar 1 proposals would lead to solutions that go beyond the arm’s length principle. Some of the proposals will break the corner-stone decades old rule of the need for physical presence to allocate taxing rights.
It is clear from the note that one of the key focus areas that is seen as a solution is allocating more profit to the market country based in locally created marketing intangibles in limited risk distribution structures. After BEPs reviews, this would force an additional deep-dive review into hundreds of these structures in the world, in any industry.
The other proposals related to user related profit attribution and Digital Era PE creations will have far reaching consequences. One way or the other, the members have agreed to look beyond the edge of the current international tax architecture and take a deep but accelerated dive as it is said the solutions consensus is to be made by the end of 2020.
Simplicity and practicality of solutions are also principles agreed in the last meeting.
All-together, something tremendously challenging considering the legacy mindset of the international taxation negotiation process, the certainty some negotiators tend to request and all that needs to happen before the solution is inked-in.
But we sense a clear change in the tone of the OECD message, and in the focus towards disruptive solutions as the path forward. Something that we consider as positive and needed.