On 9 October 2019 the OECD Secretariat published a Secretariat Proposal for a “Unified Approach” under Pillar One of the approach to taxing certain digital activities. Comments on the paper are invite by 12 November 2019 and a public consultation meeting will be held on 21 and 22 November 2019. The work will be presented to the G20 Finance Ministers on 17 and 18 October 2019.
Under the Inclusive Framework’s programme of work two Pillars are to be developed and a consensus reached by 2020, and a consultation document on Pillar Two is expected to be introduced in November 2019.
The consultation document on Pillar One focuses on the allocation of taxing rights and looks at the profit allocation and nexus rules. Pillar One takes into account the previous “user participation”, “marketing intangibles”, and “significant economic presence” proposals.
The main features of a solution to the issues would need to define the scope of the rules and include new nexus and profit allocation rules.
Scope
The scope of the proposals should cover not just highly digital business models but include consumer-facing businesses. Certain types of industry could be excluded from the rules.
New Nexus
A new nexus would be created based largely on sales, with thresholds including country specific sales thresholds that would allow jurisdictions with smaller economies to benefit. The new nexus would be designed as a new self-standing treaty provision.
New Profit Allocation Rule
This would introduce a new profit allocation rule for taxpayers within the scope of the rules, This would not be related to permanent establishment, or separate subsidiary or sales via unrelated distributors. The approach would retain the current transfer pricing rules based on the arm’s length principle but would add formula based solutions in some areas.
Three Tier Mechanism
A three tier profit allocation mechanism would apply:
Amount A would be a new taxing right for jurisdictions in the form of a share of deemed residual profit allocated to market jurisdictions using a formulaic approach, being generally the remainder after allocating deemed routine profit to the countries where the relevant activities are carried out.
Amount B – Activities in market jurisdictions, and in particular distribution functions, would remain taxable according to existing rules but fixed remunerations could be introduced, reflecting an assumed baseline activity.
Amount C – binding and effective dispute prevention and resolution mechanisms.
Summary
The proposed Unified Approach would therefore keep the current rules based on the arm’s length principle in many cases but would use formula-based solutions in certain situations related to the digitalisation of the economy. The Unified Approach would focus on large consumer-facing businesses, that generate revenue from supplying consumer products or providing digital services that have a consumer facing element. Some sectors such as extractive industries or commodities could be excluded, subject to further consultation.
A revenue threshold would create a nexus for business models involving remote selling to consumers, but would also apply where groups sell through a distributor, so there would be neutrality between different business models, and all forms of remote involvement in a market jurisdiction would be covered.
