The Organisation for Economic Co-operation and Development (OECD) continues to seek and develop solutions to the global tax challenges it set out in its 'Action Plan on Base Erosion and Profit Shifting’ (BEPS), first published in July 2013. To recap, the OECD was tasked by the G20 with trying to evaluate and identify measures to address the erosion of the global tax base. It believed that this was caused by multinational businesses exploiting gaps and mismatches in legislation to shift profits to low or no tax locations where there was little or no economic activity. By 2015, it had estimated that the corporate tax revenue losses suffered by tax authorities through BEPS could be up to USD 240 billion, equivalent to 10 per cent of global corporate tax revenues.
The OECD’s initial findings resulted in 15 action points set out in the BEPS Action Plan. Its report on Action 1, ‘Addressing the Tax Challenges of the Digital Economy’, which evaluated the tax issues posed by the digital economy and identified potential options to address them, was published in October 2015.
Seeking international consensus
The further work that has been undertaken by the OECD since has culminated in a road map for resolving the tax issues arising from digitalisation of the economy, which is, in essence, a two pillar work plan. This work plan was approved in May 2019 by the OECD/G20 Inclusive Framework group on BEPS and received further endorsement in the June 2019 meeting of G20 finance ministers in Japan. However, whilst there was agreement on the work plan, obtaining agreement on the ‘complex and difficult questions’ relating to the fundamental issue of the allocation of taxing rights remains challenging, although the OECD is seeking to reach consensus, with the agreement of all 129 nations in the Inclusive Framework group, by the end of 2020.
The pillar one work focuses on the allocation of taxing rights. It considers which jurisdictions should have taxing rights and how profits should be allocated to individual entities/business units across those jurisdictions, identifying three proposals that would modify the current methodologies and rules used to determine profit allocations. These proposals are intended, in particular, to recognise value attributable to market jurisdictions in which a business may have ‘nexus’ (ie a taxable presence) with little or no physical presence. Pillar one also considers administrative matters, the elimination of double taxation and dispute resolution in the context of the modified rules.
Pillar two looks to put in place a means by which jurisdictions could tax certain profits that have not been taxed, or are subject to low levels of taxation, by another jurisdiction. This may, in practice, give rise to a minimum effective level of tax for global businesses – a type of catch all arrangement.
The aim to achieve a global consensus by the end of 2020 is certainly extremely ambitious, as the OECD is at pains to acknowledge. However, many countries are already seeking to introduce domestic legislation in advance of consensus, so early international agreement is desirable given the scope for diverse unilateral measures in different jurisdictions.
Interim UK measures
We know already that the UK government has set its sights on introducing legislation around the taxation of the digital economy in 2020. Current proposals put forward seek to target the global established technology giants. A 2 per cent tax on gross revenues will apply to such companies that are considered to derive significant revenue from the participation of UK users. This proposed digital services tax will only apply to businesses with a global revenue exceeding £500m and that generate more than £25m in revenues from in-scope business activities, and it is intended to be repealed once new legislation reflecting global consensus can be introduced.
Given the potentially significant developments in this area of tax, businesses with a significant international presence should review the OECD proposals to see how they could be affected if the proposed solutions are adopted.
For more information please get in touch with Suze McDonald.