The OECD has further progressed its work on addressing the tax challenges arising from the digital economy, building on its most recent report from July 2020. On 12 October 2020, the OECD published blueprints on both Pillar One (which relates to the reallocation of the right to tax the profits of multinational enterprises (“MNEs”)) and Pillar Two (which is the OECD’s proposal to introduce a minimum profit tax rule globally which may require MNEs to pay top-up profit taxes) (together, the “Blueprints”). The OECD is seeking feedback on the Blueprints and will hold public consultation meetings on the reports in January 2021. The OECD has also released a public consultation document containing questions arising from the Blueprints where the OECD is particularly seeking comments.
The OECD has progressed a number of important aspects of Pillar One, including:
- Scope: the OECD has defined two categories of activities that it believes should be included in the scope of the new taxing right created by Pillar One: “Automated Digital Services” (“ADS”) and Consumer-Facing Businesses (“CFB”). The OECD has included, as part of its definition of ADS, a “positive” list of activities that would fall within the ADS category, including online advertising services, online search engines, social media platforms and online gaming. The OECD’s commentary on MNEs carrying out CFB activities does not contain such a list but makes clear that the OECD is looking to include all businesses that “generate revenue from the sale of goods and services of a type commonly sold to consumers” as part of its broad approach to the scope of any new taxing right. Importantly, the OECD also appears to be progressing towards a consensus on which businesses may be outside the scope of Pillar One, with the report including further discussions on the exclusion of activities within the financial services, natural resources and infrastructure/construction sectors.
- Double Taxation: the OECD has set out plans for a two-step mechanism by which the OECD hopes to avoid double taxation under Pillar One. The first step of the OECD’s proposed approach is to identify the paying entities subject to the new taxing right and to allocate the tax liability arising to each such entity; and the second step is to eliminate double taxation via the credit or exemption method. As with most areas of the Blueprints under discussion, the OECD still has significant ground to cover before reaching a decision on a mechanism to eliminate double taxation, such as determining the appropriate method for allocating tax liabilities and considering which of the credit or exemption methods should be applied.
- Tax Certainty: the OECD also expresses further thoughts on the way in which it proposes that disputes arising in respect of the new taxing rights will be resolved and prevented, including using self-assessment returns, permitting MNEs to request reviews from a review panel for tax certainty and considering the implementation of a binding resolution mechanisms for disputes in respect of the new taxing right.
The OECD has also made significant progress in respect of Pillar Two, and the report includes discussion of:
- Effective Tax Rate for MNEs: the OECD has set out which taxes it believes should be considered when determining what the effective tax rate of an MNE is. This effective tax rate will then be used to determine whether or not a top-up tax will need to be applied to the profits of an MNE in certain jurisdictions. Taxes that the OECD believes should be taken into account are largely income/earnings based taxes, with consumption, stamp, property and digital services taxes excluded from the list of taxes covered by the rules under Pillar Two.
- Simplification: the OECD has proposed a number of potential methods through which the implementation of a minimum profit tax could be simplified under Pillar Two. Notably, the OECD is actively considering a country-by-country effective tax rate safe harbour, a de minimis profit exclusion, a single jurisdictional effective tax rate that could be used for a number of years following its initial calculation and guidance for tax administrations to reduce the number of effective tax rate reviews that would need to be carried out in low risk tax jurisdictions.
Timing and Impact
The Blueprints suggest the OECD wishes that the process on both Pillar One and Pillar Two are brought to a successful conclusion by mid-2021.
The approach taken by the OECD in respect of the Blueprints is comprehensive and shows the OECD to be well-progressed in developing its “Unified Approach.” It is clear from the Blueprints, however, that there remain significant divergences of opinion among members of the Inclusive Framework in many areas under Pillars One and Two. The proliferation of unilateral “digital services taxes” and the need for governments to raise revenues to plug budgetary gaps caused by the COVID-19 pandemic may see additional taxing rights welcomed and progressed more quickly than would otherwise be expected. The issues flagged above are only a selection of issues arising from the Blueprints; and MNEs should be preparing for significant changes in profit taxation in future as the OECD gets closer to reaching a consensus on Pillars One and Two.