OECD Tax Talk #11 - 29 January 2019

Pascal Saint-Amans began the webinar by announcing that today (29 January 2019) the Inclusive Framework published a policy note to the challenges of taxes in a digital economy as part of Action point 1.

Tax Challenges of a Digital Economy (Action Point 1)

Pascal describes this policy note as a milestone: While in the Final Report from October 2015, was it agreed that VAT is to be levied in the country of destination , there was no agreement among the countries regarding the company profit tax. Some countries felt that the tax rules needed to be revised in this respect, others were against it and so the Final Report was published without a clear result.

In the following interim report, which was published in March 2018, then three groups of countries with different views emerged:

• The first group of countries thought that it would be better to wait for the planned report in 2020 and then evaluate whether changes in the taxation system were really needed. There might be no need for changes at all.
• The second group of countries was in favour of adapting tax rules to the new circumstances of highly digitised companies. A right of taxation should be introduced for the countries where the users of such highly digitised enterprises physically live ("user contribution concept").
• The third group of countries (including the USA) took the position that the problem of digitisation do not only affect highly digitised companies. Changes in taxation should be made for the economy at large and not only for the "digital sector".

Although no agreement was reached between these three groups of countries, they are united in their belief that they would continue working towards a long-term solution together.

Since the publication of the interim report in March 2018, the Task Force on Digital Economy (TFDE), which currently comprises 127 members, met again in July and December 2018. these meetings have been very fruitful, according to Pascal Saint-Amans. New ideas emerged which can be classified unter two pillars:

1. The first pillar relates to the "nexus approach" and the allocation of profits. When do you tax a company in this new digitalised world? Three different ideas leave are subsumed under this first pillar: a. "Active User Contribution": The current regulations on the "Nexus Approach" and the allocation of profits for highly digitised companies should be revised so that a such a company is taxed where its active user base is located. b. "Marketing Intangible Approach": This goes even further by saying that value creation today is not only by users, but also by marketing. Thus the State has a right of taxation where the market where marketing was carried out is located. This approach should apply to all types of companies, not only to highly digitised companies. c. "Significant economic presence": Developing countries in particular insist that new regulations must not be too complicated, otherwise some countries will not be able to to be implemented. The aim is to find a solution that is easy to implement.
2. The second pillar contains an idea that was mainly put forward by Germany and France. These countries state that the problem of digitisation cannot be isolated from the other BEPS objectives and the shift of profits should be further combated. One proposal under this pillar is the introduction of a minimum tax, similar to the one already introduced by the US tax reform.

These four proposals have been integrated into the policy note and states agree that they should be further studied and better understood in order to achieve a long-term and consensus-based solution as soon as possible. In addition, there is a consensus that methods which go beyond the "arm's length principle" should now be considered as well. However, this should not lead to double taxation or taxation where there is no economic profit.

A public consultation on the new policy note will be held in February 2019, during which all stakeholders (business, governments and civil society) will be able to submit written comments. A meeting will also be organised in Paris between 12 and 14 March 2019 as part of the public consultation. Based on the results of the consultation, the TFDE will submit a detailed work programme to the Inclusive Framework in May 2019 and to the G20 Finance Ministers in 2019, displaying the procedures until the end of 2020 and how to find a coherent solution.

Harmful Tax Practices (Action Point 5)

Achim Pross announced the publication of a progress report on preferential regimes. The following slide shows the progress that has been made in this area:

In addition to the continuous monitoring of the preferential tax regimes, the next step would be to examine tax regimes which have no, or only a very low, company taxation which is not in line with the real value of assets. The aim is to create equal competitive conditions - a level playing field - around the world.

Prevention of Treaty Abuse (Action Point 6)

A new report on Action Item 6 will be published in February 2019. Action point 6 (minimum standard) wants existing double taxation agreements (DTAs) to be amended so that they cannot be used to avoid taxation and to stop so-called "treaty shopping". According to Sophie Chatel, the new report shows that 65% of DTAs, i.e. the majority of DTAs, are amended in this sense through the Multilateral Instrument (MLI) and not via the bilateral route. The report also contains situation reports on a total of 116 countries.

Multilateral Instrument (Action Point 15)

87 countries have signed the Multilateral Instrument (MLI) so far, 19 of which have also ratified it. On 1 January 2019, the MLI entered into force for the first 47 agreements.

Country-by-Country-Reporting (Action Point 13)

So far, 80 countries have introduced CbCR regulations, and efforts are constantly being made to improve them. Achim Pross particularly thanked the companies that would repeatedly point out discrepancies to his team. This is very important, he stated. The tax authorities are now in the process of analysing the first country-specific reports and the OECD will soon publish a new handbook on effective tax risk assessment. Additionally, a major report on Action Point 13 will be published in 2020.

Mutual Agreement Procedure (Action Point 14)

Sandra Knaepen informed about action item 14 regarding dispute avoidance and dispute resolution. Positive news is that in 20% of cases a state can unilaterally resolve the dispute itself and that 80% of transfer pricing disputes could be fully resolved. But, of course, there is always room for improvement. The following graphs of the top 10 states, including Switzerland, were particularly interesting:

According to Sandra Knaepen, the "2018 MAP statistics" should be available by the end of May 2019 and published towards the end of 2019.

New Corporate Tax Statistics

Anne Moore and Tibor Hanappi presented the business tax statistics collected in response to Action Item 11. The first edition of the business tax statistics was published on 15 January 2019. The core message of the statistics is that corporate tax is still one of the main sources of revenue for states, especially in developing countries. The statutory profit tax rates vary from 0% to over 40%. However, the trend has been for profit tax rates to fall significantly in recent decades on all continents. However, the statutory profit tax rates are only part of the story. Tibor Hanappi concluded by showing graphs of how tax relief for research and development or the patent box affect the effective corporate profit tax. In the next edition of the corporate tax statistics, which will be published at the beginning of 2020, the data from the CbCR will also be included.

Explore OECD statistics for yourself and compare the different countries with each other

Conclusion

A lot has happened in the last few months since the last OECD Tax Talk #10, especially with regard to the digitalisation of the economy. On 15 January 2019, the State Secretariat for International Financial Matters (SIF) published an updated Swiss position on the taxation of the digitalised economy. Although there is still no consensus among countries on what the future taxation of a digitalised economy should look like, Pascal Saint-Amans and his team seem very confident that such a consensus can be found by the end of 2020. We are curious to see what happens next!

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