Addressing the Tax Challenges of the Digitalisation of the Economy – Policy Note

Countries and jurisdictions participating in the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) will step up efforts toward reaching a global solution to the growing debate over how to best tax multinational enterprises in a rapidly digitalising economy, the OECD announced on 29 January.

Renewed international discussions will focus on two central pillars identified in a new Policy Note released after the Inclusive Framework’s January 23-24 meeting, which brought together 264 delegates from 95 member jurisdictions and 12 observer organisations.

“The international community has taken a significant step forward toward resolving the tax challenges arising from digitalisation,” said Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration. “Countries have agreed to explore potential solutions that would update fundamental tax principles for a twenty-first century economy, when firms can be heavily involved in the economic life of different jurisdictions without any significant physical presence and where new and often intangible drivers of value become more and more important.”

“In addition, the features of the digitalised economy exacerbate risks, enabling structures that shift profits to entities that escape taxation or are taxed at only very low rates. We are now exploring this issue and possible solutions,” Mr Saint-Amans said.

Solutions that go beyond the arm’s length principle

The first pillar will focus on how the existing rules that divide up the right to tax the income of multinational enterprises among jurisdictions, including traditional transfer-pricing rules and the arm’s length principle, could be modified to take into account the changes that digitalisation has brought to the world economy. This will require a re-examination of the so-called ‘nexus’ rules – namely how to determine the connection a business has with a given jurisdiction – and the rules that govern how much profit should be allocated to the business conducted there.

The Inclusive Framework will look at proposals based on the concepts of marketing intangibles, user contribution and significant economic presence and how they can be used to modernise the international tax system to address the tax challenges of digitalisation.

Exploration on a ‘without prejudice’ basis

A second pillar aims to resolve remaining BEPS issues and will explore two sets of interlocking rules designed to give jurisdictions a remedy in cases where income is subject to no or only very low taxation.

Given the significance of the new proposals for the international tax system, the Inclusive Framework will issue a consultation document that describes the two pillars in more detail, and a public consultation will be held on 13 and 14 March 2019 in Paris as part of the meeting of the Task Force on the Digital Economy. Further details on the consultation process, including how stakeholders can provide input and most effectively participate, along with the consultation document, will be published by the OECD in the coming weeks.

(Source: News release | Policy note | Watch the OECD Tax Talk #11)

 

Harmful Tax Practices – 2018 Progress Report on Preferential Regimes, Inclusive Framework on BEPS: Action 5

BEPS Action 5 is one of the four BEPS minimum standards which all Inclusive Framework members have committed to implement. One part of the Action 5 minimum standard relates to preferential tax regimes where a peer review is undertaken to identify features of such regimes that can facilitate base erosion and profit shifting, and therefore have the potential to unfairly impact the tax base of other jurisdictions. This progress report is an update to the 2015 BEPS Action 5 report and the 2017 Progress Report. It contains the results of review of all BEPS Inclusive Framework members’ preferential tax regimes that have been identified since the BEPS Project. The results are reported as at January 2019.
In addition, the Inclusive Framework agreed on a new standard for substantial activities requirements for no or only nominal tax jurisdictions. This report includes the details of this new standard and the other work on additions to and revisions of the harmful tax practices framework. Finally it contains next steps for the work on harmful tax practices.

Preferential tax regimes

The assessments of preferential tax regimes are conducted by the Forum on Harmful Tax Practices (FHTP), comprising of the more than 120 member jurisdictions of the Inclusive Framework. Since the start of the BEPS Project, the FHTP has reviewed a total of 255 preferential tax regimes. The results of these reviews are now published in the 2018 Progress Report, including detailed information on how the FHTP conducts its review.

The latest assessment by the FHTP has yielded new conclusions on 57 regimes.

(Source: News release | Report)

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