129 countries agree roadmap for solution to taxing digitalised economy

The plan will be presented to G20 Finance Ministers for endorsement at their meeting in Japan on 8 and 9 June.

The OECD says that for a solution to be delivered in 2020, the outlines of the architecture will need to be agreed by January 2020. It recognises that agreement among the 129 countries by this time is "extremely ambitious" given the need to revisit fundamental aspects of the international tax system, and will require political engagement and endorsement as the proposals go beyond technical issues and will have an impact on tax revenues and the overall balance of taxing rights.

"It will indeed be a tall order to make real progress on this by January 2020. A sceptic would not believe it possible, but many thought the OECD would not be able to deliver on its 15 point BEPS action plan, or that the multilateral instrument, action point 15, was a pipe-dream. Yet the OECD proved them wrong. If they can get the major political players to engage constructively, they may yet pull this off too," said Eloise Walker, a corporate tax expert at Pinsent Masons, the law firm behind Out-law.com. 

In February the OECD issued a public consultation document inviting comments on proposals to address the challenges digitalisation poses for the international tax system. The programme of work sets out how the proposals will be considered further.

The proposals are divided into two 'pillars'. Pillar one looks at how taxing rights on income generated from cross-border activities in the digital age should be allocated among countries. Here three different proposals - user participation, marketing intangibles and significant economic presence – have been put forward, but need to be narrowed down.

The second pillar is the 'global anti-base erosion' (GloBE) proposal, which seeks to address the continued risk of profit shifting to entities subject to low or zero taxation. It is proposed that countries would remain free to determine their own tax system, including whether they have a corporate income tax and where they set their tax rates, but other jurisdictions would be able to apply new rules where income is taxed at an effective rate below a minimum rate.

In relation to the first pillar, work will continue on reaching agreement on what new method should be used to decide the new taxing right for the jurisdiction of the customer or user, but at the same time ways will be explored to allocate the profit between the various jurisdictions where users are based. Work will also continue on developing a concept of a remote taxable presence, which may require changes to the definition of a permanent establishment in double tax treaties.

As new taxing rights are likely to lead to more disputes over double taxation, the OECD will also look at the effectiveness of existing dispute resolution procedures and consider whether new measures are needed.

The GloBE proposal is being considered as some countries think that the base erosion and profit shifting (BEPS) measures to date have closed down some tax avoidance but do not go far enough in relation to structures that shift profits to entities subject to no or very low tax.

This type of profit shifting is a particular problem in the digital economy in relation to profits relating to intangibles, but it also causes problems more broadly, such as in relation group entities that are financed with equity capital and generate profits from intra-group financing or similar activities.

The GloBE proposal involves two inter-related rules: an income inclusion rule that would tax the income of a foreign branch or a controlled entity if that income was subject to tax at an effective rate below a minimum rate; and a tax on base eroding payments that would operate by way of a denial of a deduction or imposition of a withholding tax.

The GloBE proposal is not limited to highly digitalised businesses. It is designed to stop the 'race to the bottom' in relation to tax rates and to ensure that all internationally operating businesses pay a minimum level of tax.

"Quite what the GloBE would mean for the UK is unclear," Walker said. "The UK already leads the way worldwide in the breadth and depth of its anti-avoidance rules, from its controlled foreign company regime to increasingly draconian stance on transfer pricing, the diverted profits tax to taxing offshore intangibles. HMRC do not need any more tools than they already have. We will have to wait and see how many more targeted anti-avoidance rules and broad brush principles the UK can cram into its over-stuffed code off the back of the OECD's upcoming efforts," she said.

The OECD says that by January 2020 the nature of, and the interaction between, both pillars will have to be agreed. The document stresses that the solution needs to "reflect the right balance between precision and administrability" for jurisdictions at different levels of development and any solution needs to "ensure a level playing field between all jurisdictions; large or small, developed or developing".

A growing number of countries are not content with the current international tax system. The OECD stresses the importance of reaching international consensus on the issues as there are concerns that "a proliferation of uncoordinated and unilateral actions would not only undermine the relevance and sustainability of the international framework for the taxation of cross-border business activities, but will also more broadly adversely impact global investments and growth".

The UK is proposing to introduce a 2% digital services tax in April 2020 on the UK revenues of providers of social media platforms, search engines and online marketplaces. A government consultation on the design of the new tax closed in March.

Earlier this year France announced it would be introducing a 3% tax on revenues deemed to have been generated in France by digital companies where the user is essential for the creation of value. Italy, Spain and Austria are also proceeding with unilateral measures for a 3% tax and New Zealand is consulting on measures aimed at digital services companies.

EU finance ministers agreed in March not to proceed, for now, with an EU proposal for a wide ranging tax on the revenues of digital companies, which stalled last year in the face of opposition from countries including Ireland, Sweden and Denmark.