Earlier today, the OECD's G20 Inclusive Framework on BEPS published a Programme of Work to Develop a Consensus Solution to the Tax Challenges Arising from the Digitisation of the Economy, detailing the technical work to be undertaken in respect of revised nexus and profit allocation rules ("Pillar One") and global anti-base erosion ("Pillar Two" or "GloBE").
None of the three proposals on how taxing rights on income from digital cross-border businesses should be allocated - user participation proposal, the marketing intangibles proposal, and the significant economic presence proposal - have been eliminated. The Programme details three workstreams which will work in parallel to developing political agreement on a unified approach in respect of Pillar One.
Workstream One will consider three methods of allocating profits and losses to the jurisdiction of the customer and/or end user:
- a modified residual profit split,
- a fractional apportionment method, and
- a distribution-based approach which allocates a baseline amount of profit to marketing, distribution and user-related activities.
This Workstream will also explore the application of these methods on a per business line or regional basis and whether there are any appropriate limitations to the application of the new taxing right, for example by reference to the nature or size of the business.
Workstream Two will explore the development of non-physical nexus rules through the amendment of the definition of "permanent establishment" in the OECD Model Convention or the introduction of new standalone provisions. In particular, it will be considered which indicators (including local revenue thresholds) would point to a sustained and significant involvement in a market jurisdiction.
Workstream Three will consider the practical implications of the Pillar One proposal, including how the relevant data would be collected, how the person liable to the new tax would be identified and how the tax would be collected. This Workstream will also examine to what extent existing treaty provisions would prevent double taxation and how treaties could, where necessary, be most efficiently amended.
Pillar Two - GloBE
The GloBE proposal that will be explored "on a without prejudice basis" comprises an income inclusion rule and a tax on base eroding payments. It should be noted that this would not only impact the digital economy.
Pursuant to the income inclusion rule, undertaxed profits of a controlled company would be subject to a top up tax at the hands of the parent (with equivalent rules for foreign branches). In order to ensure global consistency, the Inclusive Framework appears to favour a top-up to a fixed (internationally agreed) percentage rather than to the parent jurisdiction's corporate income tax rate. How will the controlled company's profits be calculated for these purposes? Whilst recalculating such profits in accordance with the parent jurisdiction's corporate income tax rules seems to be the favoured approach, the Inclusive Framework recognises that a simpler approach might be preferable.
In respect of a tax on base eroding payments, the Programme will consider two elements: an undertaxed payments rule pursuant to which payments which are not subject to a minimum effective rate of tax would be non-deductible or subject to source-based taxation and a subject to tax rule under which such payments are subject to a withholding tax or denied treaty benefits. It is contemplated that, whilst the undertaxed payments rule would apply only to payments between related parties, the subject to tax rule would also apply to unrelated parties.
In order to avoid inefficiencies, the Programme will consider the interaction between the different rules that form part of the GloBE proposal, other BEPS measures and other internal obligations, including the EU fundamental freedoms. It will also explore whether the GloBE rules should contain a carve-out for de minimis transactions or specific sectors or industries or whether their application should be subject to a turnover threshold.
Assuming the Programme is endorsed at the G20 Finance Ministers' meeting on 8-9 June, work on the above will start immediately with a view to publishing a report on its progress in December 2019, producing a recommendation on the core elements of the long-term solution at the beginning of 2020 and publishing a final report by the end of 2020. This timetable is ambitious and will only be achieved with significant political support.