OECD reports progress on Unified Approach

United Kingdom

On 31 January 2020, the OECD issued a statement elaborating on its proposals to deal with the challenge of taxing the digital economy (the “Statement”). The Statement is focused on the proposals regarding ‘Pillar One’ (the allocation of taxing rights). At this time, no further substantive progress is reported by the OECD in relation to Pillar Two (ensuring a minimum level of taxation across all jurisdictions). The background to both Pillars is discussed here.

The Statement both providers further clarifications on the proposed new allocation of taxing rights and sets out issues where further consideration is required. Importantly, there is now an outline structure for how the Unified Approach will operate and political agreement that this proposal will be the basis for negotiation when the OECD next meets in July 2020. The OECD is expecting to finalise its plans by the end of 2020, at which point members of the Inclusive Framework can begin to implement the Unified Approach in their domestic legislation.

Pillar One proposed a new allocation of taxing rights regarding three profit “amounts,” and the OECD has given further details as to how these “amounts” will be calculated.

Amount A

Scope and nexus

Significant headway has been made to define business models within scope for Amount A taxation. The new nexus rules will not only be relevant to multi-national digital service providers, but also consumer-facing businesses which use digital technology to interact with their consumers, whether through marketing and branding activities, or through data collection. Helpfully, the OECD have provided a (non-exhaustive) list of businesses which are in scope, under the banners of “automated digital services” and “consumer-facing businesses”. The automated digital services list unsurprisingly contains business models such as providers of online search engines, content streaming, online marketplaces and cloud computing services. The consumer-facing business list is broader than initially expected and includes providers of:

  • personal computing products;
  • clothes, toiletries, cosmetics, luxury goods;
  • branded food and refreshments;
  • franchise models, such as licensing arrangements involving the restaurant and hotel sector; and
  • automobiles.

It is therefore imperative that any business which has any interaction with consumers should consider whether it will be in scope for Amount A taxation.

Concerns regarding carve-outs from the Amount A scope have also been addressed. Extractive industries and producers and sellers of raw materials and commodities will not be within scope. Less certainty is given on a blanket carve-out for financial services. The Statement predicts that most financial services will be supplied to commercial customers and therefore not within scope, but only goes so far as to say that there is a “compelling case” for consumer services to be exempted, on the basis that they are already heavily regulated.


Different thresholds will apply for different business models to be in scope for Amount A taxation. For automated digital businesses, the only threshold which must be met is a gross-revenue threshold, which is suggested to be €750m. Consumer facing businesses would have the added protection of an aggregated in-scope revenue threshold, and will also be exempted if total profit to be allocated under the taxing right does not meet a de-minimis amount. The rationale behind the extra layer of thresholds for consumer-facing businesses is to ensure that new taxing rights regarding Amount A are only granted to a user market where there is “sustained interaction” with that market, and there is an understanding that merely selling tangible goods cross-border will not necessarily meet this description. In order to demonstrate how these thresholds will operate, the OECD have provided a “decision-tree”, which can be found here.

Computation and allocation

The calculation and allocation of Amount A will see a move away from the traditional profit tax approaches. Instead of using the traditional “separate entity” method used for transfer pricing, Amount A will be based on profit derived from the consolidated group accounts. Possibly, the quantum of Amount A may be weighted to take into account how digitalised an in-scope business activity is.

While the method of allocating profit to a market jurisdiction is likewise not confirmed, this is to be based on the location of the ultimate consumer. For example, online advertising revenue will be deemed to arise where the advertising is viewed and not, as currently, where the advertising is purchased.

Amount B

The focus of the Statement is Amount A. However, the OECD do provide further detail on the meaning of “baseline distribution activities” for the purposes of Amount B. This is likely to include “distribution arrangements with routine levels of functionality, no ownership of intangibles and no or limited risks”. Businesses whose arrangements involve the cross border sale and purchase of tangibles and intangibles should therefore be aware of the differences between current transfer pricing models and the method envisaged by Amount B.

Outstanding issues

The OECD recognises that there is still progress to make. There will be a focus on ensuring that the new allocation of taxing rights regarding Amounts A, B and C will not lead to multiple taxation of the same profits.

Issues which still need to be resolved, and which are indicated to be sources of disagreement between members of the Inclusive Framework, are:

  • the binding nature of dispute prevention and resolution mechanisms, especially in relation to Amount C. The creation of an international review panel is suggested, which would provide early tax certainty in relation to Amount A and prevent disputes later down the line, though no consideration is given as to the practicalities of introducing such a system;
  • weighting the quantum of Amount A depending on the degree of digitalisation of the business activity which is within scope (which is referred to as “segmentation” in the Statement); and
  • allowing for regional factors in computing or allocating Amount A.

A “Global Safe Harbour” approach?

In December 2019, US Treasury Secretary Steve Mnuchin wrote to the OECD secretary-general raising concerns over mandatory compliance with Pillar One architecture. He suggested a “safe harbour” approach, such that compliance with Pillar One would be optional, so long as the jurisdiction could prove they complied with other (yet to be defined) measures. The Statement confirms that the OECD will consider a “safe harbour” approach. This is a strong indication that, despite several confirmations that a multilateral agreement will be reached by the end of 2020, an entirely different set of rules may emerge.


The OECD is clear that it intends for a multilateral agreement on Pillar One to be formalised by the end of 2020, and that it expects the design as set out in the Statement to be the starting point for negotiations commencing in the summer. It is also firm in its view that countries cannot properly commit to such agreement if they continue to enact (or do not withdraw) unilateral digital services taxes. The UK government has not commented on the Statement and there is no indication from the UK government that it will not carry on with its plans to introduce a digital services tax in April. Businesses will likely have to wait until the Budget in March for clarity.

The proposed in-scope activities for Amount A should encourage businesses with any consumer-facing or cross-border element to assess the risk of whether or not they are within the scope of the new nexus rules under Pillar One. The OECD’s Unified Approach is fast making progress, and it is not only traditionally “digital” businesses which are within its sights.

Article co-authored by Hannah Jones.