On May 31, 2019, the Organisation for Economic Cooperation and Development (OECD) released a work plan outlining a process for establishing new global tax rules addressing the rapid digitalization of the economy. This plan was presented on June 8, 2019 to the G-20 finance officials who reaffirmed the importance of the worldwide implementation of the OECD Base Erosion and Profit Shifting (BEPS) action plans and committed to work towards a global consensus-based solution.
The tax challenges of the digitalization of the economy were identified as a primary area of focus in the 2015 BEPS Action 1 Report. The report summarizes that the economy as a whole is shifting rapidly towards more digitalization, making it difficult to ring-fence the digital economy and highlighted issues related to broader tax challenges related to nexus, expansion of taxing rights and potential double non-taxation.
Members of the Inclusive Framework have released the blueprint as an interim report with the commitment to working towards a final report intended to provide a consensus-based long-term solution by 2020.
The core of the blueprint focuses on two "Pillars":
- Pillar One – Revised Nexus and
Profit Allocation Rules
- Focuses on the review of profit allocation and nexus rules to gain consensus on how to allocate taxing rights between jurisdictions with respect to digital income
- Pillar Two – Global Anti-Base
- Seeks to develop a set of rules that can provide taxing jurisdictions with taxing rights in situations where another jurisdiction has not exercised their primary taxing rights (i.e., situations of double non-taxation)
The concern is that if a consensus-based solution is not agreed to by the G20 timeline, there is a significant risk that more jurisdictions will act unilaterally to implement uncoordinated tax rules leading to significant risks of double-taxation. For example, following unilateral proposals in the United Kingdom and France, Mexico recently included plans in its 2020 budget to include a digital platform tax to being collecting taxes until a global consensus is established. In our Transfer Pricing Times April edition, we discussed how unilateral proposals are being viewed unfavorably in the U.S. whereas the European Commission is hoping these may spur the OECD to expedite its efforts.
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