The tax report by the OECD Secretary General to G20 Finance Ministers and Central Bank Governors was published on 9 October 2019.

Digital Economy

The digitalisation of the economy has led to problems in application of the existing tax rules and some countries are taking unilateral measures to deal with this. Changes are required to ensure that highly digitalised businesses are subject to tax in the jurisdictions where the users and consumers are located even if the taxpayer does not have a physical presence in that jurisdiction. The work program of the OECD’s Inclusive Framework on base erosion and profit shifting (BEPS) includes Pillar One concerning a new allocation of taxing rights by means of a new nexus and profit allocation rules; and Pillar Two which introduces a global anti-base erosion mechanism and aims to ensure that a minimum tax is paid.

Under Pillar One the OECD is proposing a Unified Approach to unify three divergent approaches to the issues. The Unified Approach would look for simplicity of compliance and administration; would maintain the current rules where they are functioning well and introduce changes outside the arm’s length principle where they are needed; would provide measures to eliminate double taxation; and would aim to increase tax certainty. A number of issues remain to be resolved but negotiations on the basis of the Unified Approach may make significant progress towards reaching agreement on Pillar One in the first half of 2020.

The minimum tax proposal under Pillar Two, known as the global anti-base erosion proposal, includes important design issues that still need to be addressed. These include issues such as the determination of the tax base; the extent of blending of low and high tax income; the scope of the rules; and thresholds for application. It has already been agreed that Pillar Two will operate as a top-up to an agreed (fixed) rate of tax that will be set when other design features are agreed. Some of the main features of Pillar Two may be agreed by January 2020, with a political agreement on the architecture in the first half of 2020.

According to preliminary findings the effect of Pillars One and Two would be to significantly increase global tax revenues and a redistribution of taxing rights to market jurisdictions. Both pillars would reduce incentives for multinational groups to shift profits.

Tax Transparency

The OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes has continued peer review work in relation to the implementation of exchange of information on request; and has worked on a methodology to peer review the implementation of automatic exchange of information (AEOI). The report notes that 130 jurisdictions have signed the Multilateral Convention on Mutual Assistance.

Challenges Arising From New Technologies

To combat risks to tax compliance from new technology such as crypto-assets, e-money and other new financial products the OECD is carrying out a review of the common reporting standard (CRS), ensuring that it can continue to guard against international tax evasion through digital financial innovations. Work is also continuing on strategies to maintain compliance with tax obligations arising from crypto assets and equip tax administrations with the tools to deal with the risks of financial crime using these assets. The strategies include practical training and fast access to data.

The OECD is developing a framework for a standardised reporting and exchange framework for use by any interested jurisdictions in relation to digital platforms and the growth of the sharing and gig economies. This would help tax administrations to avoid unnecessary compliance costs in identifying income generated using digital platforms in the sharing and gig economies.