On 13 and 14 March 2019 the OECD is to hold a public consultation on the tax challenges of the digitalisation of the economy. This is related to the work on action 1 of the G20/ OECD action plan on base erosion and profit shifting. The consultation aims to give external stakeholders an opportunity to provide input at an early stage in the process.

The conference follows the publication of a consultation document on the issues involved on 13 February 2019. The document noted that issues arise because a digital businesses can create value through activities linked to a particular jurisdiction without having a physical presence there, and that this can be done because these businesses have scale without mass; rely heavily on intangible assets; and give an important role to data and user participation in the business. A solution is required to this “nexus” issue to link the business to the jurisdiction for tax purposes and there will also be a need for a method of profit allocation.

Consideration of the nexus and profit allocation rules are the “first pillar” of the approach to digitalisation of the economy. Three proposals set out in the consultation document were the user participation proposal; the marketing intangible proposal; and the concept of significant economic presence.

The paper also looked at a “second pillar” of the approach that takes the form of a global anti-base erosion proposal. This would introduce an income inclusion rule to tax the income of a foreign branch or a controlled entity if the income was subject to a low effective tax rate in the residence jurisdiction; and a tax on base eroding payments that would deny a deduction or treaty relief for payments unless they were subject to an effective tax rate above a certain minimum.

Profit allocation and nexus rules

The public consultation meeting on 13 and 14 March will focus on user participation; marketing intangibles; and significant economic presence, looking at the objectives and policy rational of the proposals, in addition to the economic and behavioural implications; and the types of business that would come within the scope of the proposals.

The conference will consider the key design considerations in developing new profit allocation and nexus rules consistent with the three proposals of the first pillar. There will be discussion of the scope of the proposals, including thresholds; treatment of losses; and factors to be used in connection with profit allocation methods. The conference will also consider the merits of using a residual profit split method, a fractional apportionment method or other method to allocate income under a new income allocation rule.

Appropriate approaches are required to deal with the administrative burdens and risks of noncompliance as well as the avoidance of disputes and elimination of double taxation. The conference will consider approaches to ensuring compliance; reducing complexity; ensuring early tax certainty; and avoiding multi-jurisdictional disputes.

Participants will be invited to provide their overall assessment of the “user participation” proposal; the “marketing intangibles” proposal; and the “significant economic presence” proposal.

Global anti-base erosion proposal

Participants will be invited to share their general views on the proposals presented under the second pillar, considering particularly the objectives; the policy rationale; and the economic and behavioural implications. Participants would be invited to draw on experiences from the operation and design of existing rules that they consider would be helpful in designing the new rules.

The conference will look at key design considerations in developing an income inclusion rule and a tax on base eroding payments. The participants will consider the most important design considerations, in relation to issues such as scope limitations; and rule co-ordination.

The correct approaches are needed to manage administrative burdens and address risks of noncompliance, in addition to the resolution of disputes and avoidance of double taxation. The conference will look at ways to ensure compliance; reduce complexity; ensure early tax certainty; and avoid multi-jurisdictional disputes.