OECD tax challenges of digitalisation update

What can you take from this statement?

Of most significance was the agreement by the Inclusive Framework - a collaboration of 137 countries - to continue discussions on Pillar 1 of the proposals. This focuses on changing international tax rules, so that multinational enterprises that lead business in locations without a physical presence can be taxed, which draws heavily on a Unified Approach. This approach was put forward by the OECD Secretariat in October 2019, but it did not have all of the Inclusive Framework’s endorsement.

The OECD has previously clarified that all discussions of the Inclusive Framework take place on a ‘without prejudice basis’, which means that nothing is agreed until everything is agreed. But, endorsement to continue discussions on one proposal (the Unified Approach), rather than the number of competing proposals put forward by individual countries to date, does represent a significant step forward.

Although, this is not the end of the road to reaching a solution. There remains a number of technical challenges and a disagreement in views across countries on key areas, which will need addressing to reach a consensus. Most notably, these include a view put forward by the U.S. in December 2019, in an exchange of letters with the OECD, that reform should be subject to a safe harbour, meaning that it could go as far as allowing multinationals to elect into the Unified Approach. This is a suggestion that has been met with concern by many other countries, as they question how such reform could continue to meet the policy objectives of the overall process, if not mandatory.

What is clear is that work will not stop. The Inclusive Framework is set to reach political agreement on the design of the proposal on 1-2 July in Berlin. This will be followed by a final report setting out the technical details of the consensus-based solution by the end of 2020.

What do the proposals mean for business?

As reported in our October update, the proposals stretch far beyond just impacting technology companies. The Unified Approach focuses more broadly on multinational consumer-facing business with the Pillar 2 proposals having a potentially wider use for the majority of multinationals.

The statement is high level and extensive further work will be required throughout the year, but it does provide some further insight into the shape of the proposals. Members should consider how this proposal would apply to their business and identify any challenges it may bring.

The recent statement released provides further insight into the type of businesses that could be within scope of the main elements of the Unified Approach, categorising them into automated digital services and consumer-facing businesses. This has the potential to bring into scope a wide variety of multinational businesses including online search engines, branded foods and the automobile industry.

There are expected to be a number of revenue thresholds in place so that these proposals only apply to the largest businesses, with a suggestion that the main threshold could be set for groups with gross revenue exceeding €750m, which would be inline with thresholds set for other global tax initiatives.

An update on the OECD’s wider programme of work

The statement also included a progress report on Pillar 2, focusing on a worldwide minimum tax and noting that significant work on key issues has taken place at a fast pace with good technical progress, but significant work still remains.

CBI response

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 endorsement of a single proposal (the Unified Approach) is therefore an important step forward to reaching an agreement 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 continues to urge the government to put on hold their own unilateral plans for a digital tax.

Next steps

An international approach can and should be positive for business, by ensuring a stable tax environment and addressing 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 need to hear the concerns, ideas and challenges of businesses on how we can revise the international tax framework to address the tax challenges of digitalisation. Find out how your business can get involved and have its voice heard on the matter.