Following a meeting of the OECD’s Inclusive Framework on 8 and 9 October 2020 the OECD held a presentation on 12 October 2020 to introduce Blueprint reports on Pillar 1 and Pillar 2 of the proposals on taxation of the digital economy. Public comment is invited on the reports by 14 December 2020.
The report notes that there are convergent views on the way forward on Pillars 1 and 2. The COVID-19 crisis has prevented a full discussion of the issues but agreement on the direction of progress has been reached and the participating countries agree that a new nexus is possible. Some important policy features involving political and technical issues are still to be resolved.
Countries can still reach agreement by mid-2021 and the aim would be to draw up model draft legislation, guidelines, international rules and processes. The OECD will report to the G20 summit on 21 and 22 November 2020, and following the receipt of comments from interested parties there will be a public consultation meeting on the issues in January 2021.
Pillar One
Pillar One would grant countries a new taxing right that is no longer exclusively linked to the physical presence of the taxpayer in a jurisdiction. Taxation would be on a net basis with elimination of double taxation. Achievement of the least complex solution is important. The Blueprint recognizes that there are still open issues on the scope and quantum of the proposals and the extent of tax certainty. Further work is required on segmentation and administration issues.
Pillar Two
On Pillar Two (the global minimum tax) the Blueprint sets out the existing design including the scope, base, jurisdictional blending of income, rule design and the subject-to-tax rule. Issues to be explored in the public consultation include simplification (drawing from the design of the country by country reporting requirements) and tax administration guidance.
Impact Assessment
Based on a series of assumptions and available data the implementation of Pillars 1 and 2 would increase global corporate income tax revenue by between 50 and 80 billion US dollars. The combined effect with the US Global Intangible Low Taxed Income (GILTI) provisions would be an increase in corporate income tax revenue of 60 to 80 billion US dollars. Pillar 2 would result in revenue gains for low income countries of up to 3%.
The investment costs for multinational enterprises would be slightly increased, but the negative impact would be small as the proposals are targeting highly profitable multinational groups. The reduction in differences between national tax rates would reduce incentives for profit shifting.
If there is no consensus-based solution there is likely to be a proliferation of unilateral measures such as national digital services taxes that would give rise to significant costs in terms of disputes. The impact on global growth is estimated to be a reduction of more than 1% of global GDP.
