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Digital Services Taxes: draft MLC provisions published by the OECD

For the second year running, the OECD provided an update on the two-pillared international tax reform project just days before Christmas. On 20 December 2022, it released draft Multilateral Convention (MLC) provisions on digital services taxes and other relevant similar measures under Amount A of Pillar One for comments by 20 January 2023 and an implementation package relating to the Pillar Two Global Anti-Base Erosion (GloBE) Rules, comprised of guidance on Safe Harbours and Penalty Relief and public consultation documents on the GloBE Information Return and Tax Certainty for the GloBE Rules for comments by 3 February 2023. This post concentrates on the draft MCL provisions.

The deal struck in October 2021 envisaged that the MLC would require all parties to remove all digital services taxes and other relevant similar measures and commit not to introduce such measures in the future. Draft Article 37 deals with the removal of such measures and draft Article 38 sanctions their continued imposition through the elimination of Amount A allocations. The consultation does not include a draft of the standstill commitment.

Which taxes must be removed?

This has not yet been confirmed. Draft Article 37 requires signatories to the MLC to stop applying the taxes to be listed in Annex A to the MLC. The consultation does not, however, include a draft of Annex A. This is not entirely surprising, given that the content of this list is likely to be a controversial political issue, rather than a technical one with the resolution of which public comments might assist.

It is also currently unclear whether signatories to the MLC would have to disapply the listed taxes in respect of all companies or whether they could continue to impose those taxes on members of a multinational group headquartered in a jurisdiction that is not a party to the MLC. If such a continued application is permitted, this is likely to be bad news for US-headquartered multinationals as it is far from clear whether the US would sign the MLC (it still hasn’t signed the BEPS MLI).

How will a failure to remove the listed taxes be sanctioned? 

Draft Article 38 would remove Amount A allocations for parties failing to disapply taxes listed in Annex A. It is yet to be decided whether that removal would be complete or proportionate, and whether it should also apply in respect of DSTs imposed at sub-national level.

The same sanction would also apply if a signatory has in force a tax not listed in Annex A, but which falls within the definition of a “digital services tax or relevant similar measure” in Article 38. This definition has three key elements – that the tax is imposed primarily by reference to market-based criteria (such as user location), that its application is limited (either based on the wording of the legislation or its practical application) to non-residents or entities that are primarily owned by non-residents and that it is treated as outside the scope of double tax treaties. But it appears that, in particular, the last two limbs are still far from settled.

Draft Article 38 also specifies three types of taxes that are not to be regarded as a “digital services tax or relevant similar measure”: rules targeting artificial structures aimed at avoiding a traditional permanent establishment, value added and similar consumption taxes, and transaction taxes imposed on a per-unit basis. The first limb would seem to go some way towards answering the question whether the UK’s diverted profits tax might end up being considered a “digital services tax or relevant similar measure”. In relation to the third limb, the consultation notes that it will be further considered whether this category should be expanded to certain transaction taxes charged on an ad valorem basis – presumably such as UK stamp duty!

Who decides whether a “digital services tax or relevant similar measure” is in force (so as to trigger the sanction)?

The intention appears to be that a “Conference of the Parties” would be the ultimate arbiter of the question whether a signatory has in force a “digital services tax or relevant similar measure” so as to trigger the removal of Amount A allocations – draft Article 38(4) provides that a party to the MLC “shall be considered to have a digital services tax or relevant similar measure in force and in effect” if the Conference has determined that a party enacted such a measure and has not determined that the party withdrew or terminated it. The procedure for these determinations (as well as the rules on the operation of the Conference more generally) are still under discussion.

The consultation document acknowledges that leaving it to the Conference to determine whether (and effectively for which periods) a “digital services tax or relevant similar measure” is in force is likely to cause timing problems – what if the Conference decides in 2028 that, since 2025, a country had such a measure? Or what if a country terminates its measure, but the Conference’s official acknowledgement of that termination is delayed?

Another quirk here is that the definition of “digital services tax or relevant similar measure” operates independently of the list of taxes in Annex A (draft Article 37(2) provides that “Listing or not listing a specific measure in Annex A shall not be considered evidence as to whether or not that measure” falls within the definition of “digital services tax or relevant similar measure” in Article 38). This makes me wonder what the role of the Conference might be in relation to measures listed in Annex A - presumably it should play a similar role in monitoring/ determining the removal of such measures as draft Article 38(4) seems to envisage for any “digital services tax or relevant similar measure”…

What next?

Comments on the draft MLC provisions can be submitted until 20 January 2023.


slaughterandmay, pillar one, oecd, international tax