OECD Tax Talk #13 - 9 October 2019

According to Saint-Amans, the OECD is for the first time operating with concrete but not consensual proposals for the setting of taxes for the digitisation of the economy. Saint-Amans hopes that these proposals will help to take a step towards a modern right of taxation.

Background: The BEPS project

Pascal Saint-Amans first referred to the background of the BEPS project himself. BEPS was founded in 2012/2013, with the OECD presenting 15 action points at the end of 2015. One of these points concerned the aspect of the digital economy named in the Action 1 Report and relevant in today's Tax Talk. However, a binding solution regarding the taxation of digital companies has not been found to date. States that have paved the way for unilateral measures are disappointed. Therefore, an interim report was prepared by the OECD in February 2017 and published in March 2018 ("OEDC Tax Talk #9 - BEPS"). It showed in a fundamental way that many countries have recognised the BEPS project and the need for cooperation among countries.

Current status of the project

Due to the still existing challenges of the digitilisation of the economy and the resulting dissatisfaction of certain countries with the associated shifting of taxable profits, today's international tax rules are still uncoordinated between countries. This dissatisfaction is not beneficial for tax security and the investment environment. In the past, three specific proposals have been made regarding the reclassification of taxation law ("OECD Tax Talk #11 - BEPS").

Proposal of the OECD Secretariat

With today's Tax Talk, the OECD published a concrete proposal to solve the taxation problems associated with the digitalization of the economy. Although the OECD's approach with the Secretariat's proposal is unusual, Pascal Saint-Amans stressed the importance of the proposal in order to ensure that a common and coordinated approach can be enabled. At the same time, he stated that this proposal was not binding on the Member States. In concrete terms, the Secretariat's proposal is structured as follows:

The proposal is divided into two pillars. The first comprises the "Unified Approach" with the aim of changing the taxation of company profits in such a way that profits will in future no longer be taxed at the place of presence/registered office, but at the place of the market and the consumers.

The second pillar regulates the question of which companies should/may be taxed under the provisions of the first pillar .  

First pillar

Richard Collier is given the floor to present the first pillar. According to Collier, the OECD Secretariat's proposal aims to bring together the three proposals made by the states ("OECD Tax Talk #11 - BEPS") and to eliminate commonalities. The main objective is to reallocate the profit of the companies to the market and to the consumers of the respective jurisdictions. The common approach should be as follows:

The coexistence of the Arm's Length Principle (ALP) and the OECD's new proposal for the "Unified Approach" requires a redesigned infrastructure. This means the elimination of the place of taxation of the residual profit as included in the ALP and the implementation of a new right of taxation at the same time.

On the question of the scope of the new regulations, Richard Collier gives the floor to Sophie Chatel. The main issues addressed by the new rules are multinational enterprises (MNE). This includes those with large global revenues and highly digitalised business models, as these have numerous interactions with consumers and users of the market in a given jurisdiction. In addition, an application to B2B activities and non-digitalised models could also be considered. Meanwhile, Sophie Chatel emphasises that the impact of the new distribution of profits must be carefully and individually worked out with regard to different industries.

The nexus rule as an essential part of the "Unified Approach" concerns the question to what extent the companies, which are included in the relevant scope, interact with the jurisdiction of the relevant market. These new provisions (nexus rules) do not aim at the traditional physical presence of a company in a particular jurisdiction, but rather examine the respective interactions of such a multinational company with the corresponding market. What is required is a significant influence on the economy by, for example, exceeding a turnover threshold. According to Sophie Chatel, in addition to this turnover threshold, a time limit might also have to be considered. In this respect, multinational companies operating in the relevant market for more than one year could fall within the scope of application. However, Chatel explicitly emphasises the efforts by the OECD not to interfere with existing bilateral agreements, especially since the OECD only wants to implement a global assessment.

Regarding the question of how much of the corresponding profit may now be taxed in the state of the market, Sophie Chatel again hands over the floor to Richard Collier. He underlines the three essential core elements of the "Unified Approach". Option A contains the new right of taxation, Option B the improvement of the ALP and Option C prevention and dispute resolution. In particular, Richard Collier focuses on option A with the introduction of a new taxing right.

He highlights two points in particular for option A: firstly, there will be no interactions with the company's transfer pricing matters; secondly, an agreement on the definitive thresholds, e.g. the turnover threshold, is currently pending. Finally, option B is designed to improve the existing transfer pricing system under the ALP, while C focuses on dispute prevention and resolution.

Second pillar

Achim Pross then introduced the 2nd pillar of the Secretariat's proposal. He recapitulated the difference between pillar 1 and pillar 2. Pillar 1 deals with the question of where the right of taxation lies, while pillar 2 deals with the question of which companies are affected by the new rules. The general nature of the 2nd pillar, which in contrast to the 1st pillar, is not exclusively designed for the digital economy, but also considers profit shifts as a whole. With pillar 2, it is certain that internationally active companies which generate worldwide income should be taxed on a minimum level. At the same time, existing BEPS concerns must also be pursued. In this regard, Achim Pross addresses the fact that there is currently a certain unease among the states with regard to Action Point 3 - the CFC regulations. He also refers to a brief overview of the GloBE proposal, which as a unified system tries to achieve interlocking provisions in order to ensure a minimum level of taxation.

The economic impact of the new regulations

The newest member of the Tax Talks, Asa Johansson, stated right at the beginning that the work is an ongoing process. Therefore, the OECD has currently only made various assumptions. The combination of pillar 1, the place of the right of taxation, with pillar 2, the subjects of the right of taxation, presumably leads to massively higher global tax revenues. The reasons for this increase are shown in the following slide. At the same time, Asa Johansson dampens the fear that a combination of both pillars will negatively affect the investment environment for the companies. This is because the impact on tax rates is modest. There would be a reduction in the distribution of profit tax between the jurisdictions and, consequently, efforts of multinational companies to shift their profits.

Finally, Pascal Saint-Amans once again expressed his views on the next steps to be taken. Meanwhile, he said it was important for all stakeholders, that a fruitful dialogue can take place, including in the context of the public consultations on the OECD Secretariat's proposal. The first public consultation concerning pillar 1 was launched by the OECD on the day of the Tax Talk. The second consultation on pillar 2 took place in November/December 2019 and a comprehensive meeting of states was held in January 2020.

According to Pascal Saint-Amans, it is important to recognise that the OECD Secretariat's proposal contains elements that are relevant to the various conflict-prone positions of the states for an agreement. He concluded by inviting all interested parties to provide opinions and inputs and to ask questions.