On 18 July 2020, the OECD published further updates on its proposals to tackle the tax challenges arising from the digital economy, building on its previous announcements in October 2019 and January 2020. The OECD publication outlines the progress made over the last six months, noting good progress has been made in respect of Pillar One (the reallocation of the right to tax the profits of multinational enterprises (“MNEs”)) and significant progress has been made in respect of Pillar Two (the proposal to introduce a minimum profit tax rule globally which may require MNEs to pay top-up profit taxes). Particularly, the OECD notes that the US Treasury Secretary, Steve Mnuchin, has supported the idea that negotiations in respect of Pillar Two could conclude by the end of this year.
The OECD recognises that it still has significant ground to cover in respect of both Pillars in a number of areas. In respect of Pillar One, this includes work to be done to reduce the scope of segmentation under Amount A (which may in turn simplify the approach in calculating the quantum of MNE profits under Amount A). In respect of Pillar Two, this includes work to further consider potential carve-outs from Pillar Two and in determining how Pillar Two will align with regimes such as the US Base Erosion Anti-Abuse Tax (“BEAT”) regime and the US Global Intangible Low-taxed Income (“GILTI”) regime. The OECD also notes that it needs to give further consideration to the proliferation of unilateral digital services taxes being introduced globally (such as the UK Digital Services Tax which came into force in the UK in April 2020 – please see here) and the double tax risk that may manifest if such digital services taxes continue to exist alongside the proposed Unified Approach.
Given the progress that the OECD is making, MNEs in particular need to be ready to embrace the significant changes that will take place as and when a consensus is reached on the Unified Approach. The OECD state that further announcements on the development of the Unified Approach will be made in October 2020.