After months of extensive consultation with stakeholders (including governments, businesses and NGOs), on 9 October 2019 the OECD Secretariat released a proposal for a ‘Unified Approach’ on Pillar 1 of their Programme of Work: to develop a consensus solution to the tax challenges of the digitalisation of the economy.
The proposal focuses on how the current rules which allocate taxing rights between jurisdictions might be amended to take account of digitalisation.
What do the proposals mean for members?
The proposals stretch far beyond just impacting tech companies, and focus more broadly on multinational consumer-facing businesses, seeking to grant new taxing rights to jurisdictions in which consumers are located. With this comes the potential for these proposals to represent a significant shift in the taxation of multinational companies, including where they are subject to tax.
We should be clear that the proposal comes from the OECD Secretariat and therefore would still need to be agreed by the current 134 members of the Inclusive Framework. However, the proposal is the output of months of extensive consultation with member country delegates. This is an important step forwards and brings to the table a single proposal for discussion, in which the Secretariat has sought to draw on the commonalties from the competing views of member countries. The proposals are high level and clearly there remain a number of outstanding questions. It is welcome that the OECD is consulting on the proposal and members should be considering how this proposal would apply to their business and identify any challenges it may bring.
Governments and business agree that the OECD is the right organisation to lead this reform of the international tax framework for the digital age. This proposal is therefore an important step forward to reaching a consensus on the future approach to tax challenges arising from the digitalisation of the economy by the end of 2020.
In light of this progress and the many weaknesses of siloed revenue-based taxes (such as the UK’s proposed Digital Services Tax), the CBI has urged the government to put on hold their own unilateral plans for digital tax.
Whilst the proposals progress the debate, there remain a number of crucial points to be resolved and the OECD is consulting on this ‘Unified Approach’ proposal.
An international approach can and should be positive for business, by ensuring a stable tax environment and to address the political momentum for governments to adopt fragmented measures in response to the impacts of digitalisation. But to get it right, the OECD and UK government needs to hear the concerns, ideas and challenges of businesses on how we develop an international tax framework which addresses the tax challenges of the digitalisation of the economy. Find out how your business can get involved and have its voice heard on the matter.
An update on the OECD’s wider programme of work
The wider programme of work also includes a Pillar 2, and whilst not the topic of this paper, it’s important to note that this pillar has not disappeared. An update on Pillar 2, which focuses on a global anti-base erosion rule to address scenarios which may enable multinationals to shift profits to no or low tax jurisdictions, is expected in early November.