The Inclusive Framework on base erosion and profit shifting (BEPS) has issued a new Policy Note under action 1 of the action plan on base erosion and profit shifting (BEPS) entitled Addressing the Tax Challenges of the Digitalisation of the Economy. The policy note was released after the Inclusive Framework’s meeting of 23 and 24 January 2019.
This policy note follows an Interim Report published in March 2018 by the Inclusive Frameworks’s Task Force on the Digital Economy (TFDE) entitled Tax Challenges Arising from Digitalisation – Interim Report 2018. This set out an analysis of value creation in the changing business models resulting from digitalisation and the tax challenges they presented.
The latest policy note indicates that renewed international discussions on the taxation implications of the digital economy will focus on two central pillars identified by the Inclusive Framework.
The first pillar will focus on how existing rules on allocation of taxing rights between jurisdiction, including traditional transfer-pricing rules and the arm’s length principle, could be adapted to deal with the new situation created as a result of digitalisation of the global economy. This would include revision of the ‘nexus’ rules that determine the connection between a business and a particular jurisdiction; and of the rules that govern how much profit should be allocated to the business carried on in each jurisdiction.
Proposals have been put forward to allocate more taxing rights to user jurisdictions in situations where value is created by a business activity through participation in the user or market jurisdiction. Currently this may not be recognised in the framework for allocating profits.
The Inclusive Framework is examining proposals relating to how issues such as marketing intangibles, user contribution and significant economic presence could be used to help the tax system meet the challenges of digitalisation.
The Inclusive Framework notes that the proposals may affect a wide number of enterprises and not only a small group of highly digitalised businesses. This could include businesses with profits from marketing intangibles but limited risk distribution structures in market jurisdictions. Further work must take into account potential scope limitations, business line segmentation, profit determination and allocation in addition to the nexus and treaty considerations.
The second pillar would look at other remaining BEPS issues and look at two sets of interlocking rules that could help jurisdictions to resolve situations where income is subject to no or very low taxation. The proposals put forward in the policy note address the risk of profit shifting to entities subject to no or low tax by developing an income inclusion rule and a tax on base eroding payments.
The Inclusive Framework aims to produce a consultation document setting out the two pillars in more detail in time for a public consultation to be held on 13 and 14 March 2019 during the meeting of the Task Force on the Digital Economy. In the coming weeks further details will be made available on the consultation process and collection of input from stakeholders.
