DET3 input to OECD Unified Approach under Pillar 1

Last November 2019 21st and 22nd OECD organized a public consultation on the Unified Approach under Pillar 1

You can find the complete input DET3 contributed to that process in the reports section of our web, but see please below the


  • Strong need to clarify concepts & definitions, specifically regarding:
    • Excluded industries
    • Level of the market of activities in scope (B2C / or B2C + B2B)
    • Remote interaction
    • Activities behind the portion of the residual profit allocated through A amount
  • Highly regulated industries such as financial services, utilities or telecom, or regulated activities fulfilling certain criteria should be left out of scope
  • Revenue alone should not be sufficient to trigger the New Nexus rights; Consider introducing complementary qualitative KPIs supporting the “sustained and significant remote involvement“ in the market country.

  • If confirmed that A amount covers sales & marketing intangibles residual profit allocation to the markets, the NTR should spot when there is meaningful remote commercial interaction with a consumers base from abroad, likely with strong assistance of digital technology.

  • The NTR should not in our view be triggered when the majority of revenue obtained in the market is derived by a local entrepreneurial customer facing entity with appropriate substance that pay arm’s length taxes locally
  • When NTR applies, a minimum segmentation for activities or Business Lines may become necessary, although it will generate significant workload as the process itself will bring a high level of complexity.
  • Flexibility is needed for MNEs to define their level of activities aggregation. Homogeneous approach in information sources will be required
  • A consistent methodology should be used to determine the profits affecting A, B & C amounts in a way that can be traced and reconciled. To avoid double/multiple taxation, but also to facilitate review and administration of the new system under the Unified Approach 
  • Examples of the interactions between the NTR rules and current profit allocation rules will be appreciated

Disecting the UK Digital Services Tax July regulatory package

The UK Government published last July a draft version of their Digital Services Tax regulation, as part of a package containing also the Government response to the key questions from public consultation observations, and a document with additional Guidance and explanations.

The text evolved the approach of taxing business models to taxing digital services activities, which is still a concept wider than a specific digital service.  The revenue to be taxed is that of the relevant activities when deriving from a UK user contribution (engagement or interaction).  

Digital services activities in scope:  

Social media platform”: online platform whose main purpose, or one of the main is to promote interaction between users  and that enables content to be shared with other groups of users.

Online marketplace”: online platform whose main purpose, or one of the main purposes is to facilitate the sale by users of particular things to other users, or to advertise or otherwise offer to other users particular things for sale.  An exception for Financial Services e-marketplaces is in the text.

In this context, “thing” means any services, goods or other property; and the  reference to the sale includes hiring it.

“Internet search engine”

Additionally, there is now a new definition affecting the 3 type of digital activities, which is carrying on any associated (to those) online advertising business.

 The revenue is attributable to UK users when:

·        The advertising is intended to be viewed by UK users or when it arises in connection with UK users

·        The online marketplace revenues arise in connection with a transaction to which a UK user is a party, or with the sale of an interest in premises or land in the United Kingdom, or includes the provision of accommodation in the United Kingdom  

An additional nuance introduced for online advertising revenues is that it includes both revenues from the provision or the facilitation of online advertising;

Annual DST Threshold

Total amount of digital group services revenues exceeding £500million, AND

total amount of UK digital services revenues of the group exceeds £25million.

DST liability calculation

 The total amount of UK digital services revenue of the group, will be reduced in £25million before applying the  2% tax rate.  The net result is “the group amount” to be paid, whose liability will be allocated to each group legal entity that obtained the revenue.

In the case of e-market places, 100% of the DST liability is to be paid if the other user of the transaction is in a country with no DST or equivalent in place. In case there is, there is a relief that disregards 50% of the obtained revenue.

 Alternative basis of DST Group liability calculation, as a safe-harbor

A new element is that the tax payer has the option to chose an alternative way of computing the tax liability instead of the standard one, an can opt activity by activity (all, part, or none). This is for the case any of the in-scope activities of the group has a compromised profitability or is loss making.

It requires first a breakdown of the UK digital activities services revenue and apportioning it between the 3 categories, discounting to each one its relevant proportion of the £25million threshold.  It requires also the operating margin of each activity in scope.  Then, the taxable amount for each revenue category is 0.8 times the operating Profit.

For using this computation, a group must logically be able to segment the relevant operating expenses per category of revenue, excluding interest expenses, business acquisition expenses, extraordinary items, assets impairment charges, taxes.

For any other category of revenues not opted-in, the taxable amount remains 2% of the net  revenues.   

Compliance, data source and timeframe

UK DST is due and payable on the day following the end of 9 months after the end of the accounting period. The responsible member to pay the DST is the parent of the Group unless any other legal entity has been nominated by it by written.

Accounting base for the DST:  Any reference to a group’s accounts is to the consolidated accounts of the group’s parent and its subsidiaries.

The “applicable accounting standards” are those governing the group accounts, (UK GAAP; US GAAP;…. otherwise, IAS.

Anti-avoidance rules

The draft contains anti-abuse rules, and any “relevant avoidance arrangements” or scheme or series of transactions will be amended or disallowed by HMRC if their main or one of their main purposes, is to enable a person to obtain a tax advantage (avoidance, reduction or deferral)  in respect to DST application.

There are a good number of additional enforcement and control rules in the July 09 draft text.


Despite the international political turbulence, the work under this UK DST regulatory draft package is deep, indicating a strong behavioral intention to pass it and enforce it.

The introduction of a main activity test that can be interpreted from the definitions is something logical and that we have been claiming for other countries unilateral regulations.

The draft seems more detrimental in terms of Digital Advertising than the rules of the EU draft directive because of the inclusion of the “associated online advertising activity revenue” of the 3 activities as in scope and the incorporation of the intermediary roles revenue in the saturated and big WW Adds value chain.

The inclusion of renting as comprehended by the definition of sale of a thing in the online market places case might affect many new and disruptive digital value propositions based on subscription or flexible consumption models that work cross-border.

The thresholds are indicative of a targeted approach and a commensurate with compliance effort approach for the taxpayer and more logical than those of other unilateral drafts.  

The allowances and reliefs included are addressing some of the concerns expressed by the stakeholders during the recent consultation and are contemplating a good number of the potential cases around, with practical explanations included.

Will we see a Bush Administration counter-act to this close allied initiative? Is the UK Gin the new French Borgona? Or does the pharma UK sector need to put an eye on the conversation?  An interesting period ahead.  



The 2 days were very focused in getting real-time public stake-holder’s inputs during he sessions, with countries Tax Administration representatives mainly observing the dynamics.  The very collaborative & inclusive nature of the session was very appreciated by attendees.



Almost general acceptance that this is an overall economy topic and ring-fencing not necessary nor appropriate. Someone pointed that “there is no real difference between a marketplace intermediary and a financial intermediary”.


Commitment to work for tax system change was shown by all stake-holders.

Any solution must accommodate future changes and not just current situation.

Getting the BEPS Inclusive Framework 129 countries coalition consensus will be a challenge as there will be winners and losers.

For some it is not possible to reach deep & general consensus, universally binding dispute resolution and to do it all in two years.

For others timeline to consensus is triggered by unilateral measures and the fact that there is a mandate for a quick resolution because countries’ need for revenue is urgent.

Others, like DET3, we are of the opinion that the international tax community needs to focus on timely solutions now. The sooner we are all “hands on” on alternatives, the better.


TFDE) is currently developing a work program for discussion and approval by the Inclusive Framework by the end of May. The “hard technical work” on the alternatives will be between May and 2019 end or 2020 January, when a progress document for discussion will be presented.


  • Deep articulation of principles required by some of the participants.

  • Some preferred a solution based on a value creation framework instead of a destination framework cause of potential economic distortions.
  • Important for any solution to take into account the cost of capital and how it affects trade and investments. If education & innovation country is not rewarded, incentive to invest decreases, with potential impact on environment & climate change.

    Any solution must have balance between the reward to innovation and the reward to destination. Any residual allocation of taxing rights should not provide much taxing power to market countries.
  • Adopting some of these tax proposals could undermine the ability of potential creditors to assess a company’s solvency risk (likely referring on stand-alone legal entity basis).
  • Any proposal adopted must be simple enough to be enforced throughout the world.


  • For some stake holders, TP is the principle to protect at maximum, but others welcome a shift to a greater use of formulary-based methods.
  • Trade Unions: TP rules & the arm’s length principle are “a recipe for fragmentation.” They support moving to formulary apportionment and disputes the notion that nations cannot agree on a formula. 
  • Commentators like DET3 indicated that if to a right work in selecting the factors and the combination of those, it can be a very rational representation of facts & circumstances and ultimately value creation. But just 3 factors won’t do it. See DET3 suggestion/proposal contained in our comments.
  • A movement to the location of “value realization” concept (versus creation) was also suggested by a scholar.
  • Any move away from the arm’s length principle should be based on a deep principled approach in the opinion of some.
  • Distinctions should be made between distributors versus component manufacturers, raw material manufacturers, or intermediate goods manufactures.
  • A number of observators asked to just improve the Arm’s length standard rather than Pillar 1 options, as it is based on sound economic principles, though it may need be tweaked to achieve fairness.
  • It was mentioned that TP is not about transactions but about allocation of profits, and if changing Art.9 to introduce un-related transactions/activities coverage was an option?.


  • User participation was the less accepted option in general as it may not lead to the same amount of value in different businesses, can cause distortions and ring fences.
  • Formulary solutions or SEP, perhaps with rebuttable presumptions, safe harbors, and controlling mechanisms were mentioned by many of the commentators.

  • Many stakeholders, including DET3, pointed that SEP and the economic presence test would more comprehensively address the international tax challenges arising from the digitalization of the economy. In our view it can be a good enough technical path to articulate a transition to the future international taxation system.

  • Marketing intangibles option (MI) liked by many commentators. Spirit in the air that day little more inclined to this option although many pointed the absence of development of the SEP alternative as a reason for a limited analysis on it versus MI.

The problem with marketing intangibles approaches almost everyone agreed is complexity and many mentions to the fact that MNEs sell cause of great products and not only great marketing. Marketing intangible not to be overvalued.

Also, the determination of where is consumers demand generated, if locally or through external efforts??

  • Although the OECD provided a hybrid alternative joining user and marketing intangible options, almost no reference was made to such.
  • Certainty over accuracy preferred by the business representative’s majority.


Johnson & Johnso proposal, departing from AL but traceable, simple and providing certainty to resolve the perceived market country under compensation.

Some representatives urged the OECD to do impact assessment about the options on the table with real data.

Richard Bradbury said the OECD lacks access to needed data to evaluate impact and they would really appreciate companies to share their insights or impact analysis on their business with the OECD on a confidential basis.


Surprise in part of the audience about this pillar sudden emergence. Many controversies.

Some mentioning that a minimum tax would relive tension from Pillar 1, others questioning it frontally cause of the potential damage to economy of this new rules on top of the existing measures.

Focus should be addressed to low/no economic activity and substance.  Substance test to manage any income inclusion or deduction denial rule.  Something we clearly endorse from DET3.

Commentators pointed that any minimum tax should work on foreign consolidated accounting basis using ultimate parent financials and imposing the tax at the ultimate parent level.


On November 29th 2018, the EU Presidency sent to the Council the revised proposal for a Directive on the common system of a digital services tax on the revenue from certain digital services, that was made public yesterday before the ECOFIN ministers meeting, where we also knew the last minute agreement reached before the meeting between Germany and France on the topic (the “Franco-German joint declaration” (*).

This last movement has been perceived by some as a relevant step back and by others as the potential enabler of a final consensus and it will likely affect the work that was done in developing the Directive draft, as it brings to the negotiation table an important cut down of the number of services in scope.

In any case, the new Directive text updates the March draft and it is considered a compromised agreement text accepted by a good number of countries. Presidency mentions that it is time then for the political segments of the EU to take a clear stance on this now.

As we have commented on the previous Directive draft, and published our contribution to the public comments period in our reports section, we focus now on the novelties and differences we see as relevant in the text at first glance:

  • User definition: includes now not only any legal person, but any “legal arrangement, whatever its nature is, that accesses a digital interface with a device”.
  • Target advertising definition incorporated: Confirms that it is about digital promotional communications targeted at users of a digital interface based on data collected on them. And not generic digitally displayed advertising. Burden of proof to support undeclared “non-targeted” advertising is now on the taxable person.
  • Removal of the previous complex references to financial systematic internalizers and crowdfunding schemes, to be replaced by straight “regulated financial service” or “regulated financial entity”, concepts that are included in the definitions article and that are subject to authorization and supervision under “any” harmonization measure adopted by the EU, including providers subject to equivalent non-EU supervisory measures.

The supply of regulated financial services by regulated financial entities are not subject to the tax.

  • Sales of Data generated with user participation: sales of data captured with sensors (IOT) or sale of data by a regulated financial entity are also clarified as not subject in the current text.
  • In order to qualify for being a tax payer, thresholds remain at group level, whereby now in the new text the taxable person will be every individual entity of the group providing taxable services and not the group as a whole.

It will be possible nonetheless for one single entity of the group to file one consolidated return on behalf of all the liable taxable entities (MOOS equivalent).

  • Under the new text, non-EU established groups, that have several companies in EU member states who become liable, could see any of these EU based companies being required by a Member State of the other EU based entities to pay in that country on behalf of their local failing company.
  • Timeframes for Directive implementation: Transposition timing limit is moved further from December 2019 to December 2021 in this draft. Entry into force, from January 1st 2020, to January 1st, 2022.
(*) The impact and consequences of the Franco-German declaration will be subject to a separate analysis in another post/article coming soon, but please see the EU Digital Services Roadmap we publish today, incorporating  the potential effects of such declaration with a visual perspective.


As the situation is very dynamic, with fragmented information, and a number of things still in development, this is our visual explanation of the most updated status of the EU Digital Services Tax discussion, timeframes and options, all in connection with the international context.  We hope it helps the international community.

Please note that according to the process outlined in December 4th Franco-German declaration, the OECD solution would have to be translated into EU law before January 2021 for the Directive (if passed until March 19) not actually entering into force in January 21.

Click on Roadmap to enlarge

digital economy taxation ECOFIN & OECD levels