The Inclusive Framework's update on its two-pillar approach to addressing the tax challenges of the digitalisation of the economy has clarified the scope of Pillar One - the outline of the architecture of a unified approach has been agreed. Progress has also been made on Pillar Two and the Inclusive Framework remains committed to reaching agreement by the end of 2020. This remains an ambitious aim as significant technical challenges and critical policy differences still exist in respect of both pillars - the revised Programme of Work on Pillar One alone has 11 separate work streams!
Pillar One – New taxing right (Amount A)
It is becoming clearer what will be in-scope and what will be carved out of the scope of Amount A, although definitional issues remain to be resolved. The in-scope businesses have now been split into two categories:
- automated digital services provided on a standardised basis to a large population of customers or users across multiple jurisdictions such as online search engines, social media platforms and online advertising, but excluding services which might be delivered online but involve a high degree of human intervention and judgment (such as legal, accounting, architectural, engineering and consulting services)
- consumer-facing businesses that generate revenue from the sale to consumers of goods and services such as computers, mobile phones, cars, clothes, luxury goods, branded food and refreshments, and franchise models (such as licensing arrangements involving the restaurant and hotel sector).
The outline confirms carve-outs for extractive industries and other producers/sellers of raw materials and commodities, and airline and shipping businesses. It acknowledges that most activities of the financial services sector take place with commercial customers and will therefore be out of scope but notes that there is a compelling case for consumer-facing business lines within the financial services sector, such as retail banks and insurance which are highly regulated in the market jurisdiction, to be excluded from the scope. Consideration might be given to whether any unregulated elements of the financial services sector require special consideration, such as digital peer-to-peer lending platforms.
It has also been agreed that the tax base for Amount A will be profit before tax as derived from the consolidated group financial accounts; the new taxing rule will apply to both profits and losses; and that there will be carry-forward loss rules.
One stop shop
The need to minimise complexity is acknowledged, and the outline promises the exploration of the “one stop shop” mechanism for simplified filing and registration which proved popular during the consultation.
Safe harbour proposal
The US proposal to implement Pillar One on a “safe harbour” basis is noted in the Statement and exploring the implications of it is included in the Program of Work. The final decision on this matter will be taken only after other elements of the consensus-based solution have been agreed on, but resolution of this issue will be crucial to reaching consensus.
According to the statement, there should be agreement on the key policy features of a consensus-based solution by July 2020. Even the OECD describes this timeline as ambitious!