Brussels, 06 October 2020
WK 1733/2020 REV 1
LIMITE
ECOFIN
FISC
WORKING PAPER
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MEETING DOCUMENT
From:
General Secretariat of the Council
To:
Working Party on Tax Questions (Digital Taxation)
Subject:
Update on the OECD Project "Tax Challenges Arising from the Digitalisation of
the Economy"
Delegations will find attached a PowerPoint presentation made by the OECD at the Working Party on Tax
Questions (Direct Taxation - Digital) on 13 February 2020.
WK 1733/2020 REV 1
LIMITE
EN
Update on the OECD Project
“Tax Challenges Arising from
the Digitalisation of the
Economy”
Mayra O. Lucas Mas
Senior Transfer Pricing Advisor, OECD
13 February 2020
Disclaimer
This work is released under the responsibility of the
Secretary-General of the OECD. The opinions expressed
and arguments employed herein do not necessarily reflect
the official views of OECD Member countries.
2
Agenda
• Introduction
• Package agreed by the G20/OECD Inclusive
Framework on BEPS (IF)
• Next steps
3
Plenary meeting of the
Inclusive Framework on 29-30
January 2020
•
122 jurisdictions
•
360 delegates
4
State of Play
Political support for
Tensions in the
a consensus-based
system
global solution
G20 mandate
to arrive at a
consensus-
based solution
by 2020
5
Two Pillars
Pillar One
Pillar Two
Allocation of profits
and
GloBE
Need for political
new nexus rule
endorsement &
spirit of
Economic analysis and impact assessment
compromise
Consensus-based long-term solution by
the end of
2020
6
Proposed “Unified Approach”
under Pillar One – October 2019
Pillar One
New nexus rule
Amount A
Proposal of the Secretariat
Portion (%) of residual
for a “Unified Approach”
profit
Multi-tier approach
Profit allocation
Amount B
Fixed return for
rules
Tax certainty
distribution functions
Amount C
Additional return based
on TP analysis
7
Consultations
Public Consultation Pillar 1 – November 2019
•
300 submissions of comments
•
3 000 pages of comments
•
500 participants attended the public consultation meeting
Public Consultation Pillar 2 – December 2019
•
180 submissions of comments
•
1 300 pages of comments
•
200 participants attended the public consultation meeting
8
8 Regional outreach events since October 2019
8
PACKAGE AGREED BY THE
INCLUSIVE FRAMEWORK
9
Outcomes IF Plenary
29-30 January 2020
Members approved
•
Statement from the IF
•
Outline of the architecture of the “Unified
Approach” under Pillar One
•
Annex: Revised Programme of Work on Pillar One
1
•
Progress Note on Pillar Two
0
10
Statement – paragraph 1
• Strong support from IF members for reaching a multilateral agreement
with respect to Pillar One and Pillar Two
• Recognising the concurrent work on a without prejudice basis on the
two pillars, [they] affirm their commitment to reach an agreement on a
consensus-based solution by the end of 2020
• Agreed upon an outline of the architecture of a Unified Approach on
Pillar One as the basis for negotiations
• Welcomed the progress made on Pillar Two (which follows the outline
of Pillar Two in the PoW)
11
Statement – paragraph 2
• Pillar One: IF endorses the Unified Approach as the basis for the
negotiations of a consensus-based solution to be agreed in 2020
• Proposed reallocation of taxing rights under Pillar One would require
improved tax certainty, including effective and binding dispute prevention
and resolution mechanisms
• In the design and implementation of the solution, IF acknowledges the
need to minimise complexity
12
Statement – paragraph 3
• IF members note
– technical challenges to develop a workable solution
– areas where critical policy differences remain to be resolved to reach
an agreement
– a December 3 letter from the US Treasury Secretary to OECD
Secretary-General Gurría
• reiterating the US political support for a multilateral solution and
• including a proposal to implement Pillar One on a ‘safe harbour’
basis
13
Statement – paragraph 3 (continued)
• Many IF Members express concerns ‘safe harbour’ basis could
– raise major difficulties, increase uncertainty and fail to meet all of the
policy objectives of the overall process
• Note
– although the final decision on the matter will be taken only after the
other elements of the consensus-based solution have been agreed
upon
– resolution of this issue is crucial to reaching consensus
14
Statement – paragraph 4
•
Recognise number of other issues where significant divergences will have to be
resolved; including:
1.
binding nature of dispute prevention and resolution mechanisms and scope
of the dispute resolution mechanisms under Amount C
2.
Digital differentiation
3.
Regional segmentation
•
Note concerns expressed by some jurisdictions and businesses about the
continued application of Digital Service Taxes (DSTs)
15
Statement – paragraph 5
Pillar Two
• IF welcomes the significant progress on the technical
design of the Pillar
• Notes that more work needs to be done (as described
in the progress report)
16
Statement – paragraph 6
• The IF notes
– the good progress on the economic analysis and impact assessment of
Pillars One and Two
• The IF calls
– for continued efforts to strengthen the analysis with caution due to
data limitations and
– for more detailed analysis on the investment and growth impacts of
the proposals before the end of March 2020
17
Statement – paragraph 7
• Reaffirm
– commitment to bridge the remaining differences and
– reach agreement on a consensus-based solution by the end of 2020
• Noting agreement will depend on the further concurrent work which will
be carried out on the two pillars
• Important step: next meeting in early July
– intended to reach agreement on key policy features of solution which would
form the basis for a political agreement
18
OUTLINE OF THE
ARCHITECTURE OF A
UNIFIED APPROACH ON
PILLAR ONE
19
The New Taxing Right (Amount A):
Scope (section 3.1)
Automated digital services
•
Provision of automated digital services that are provided on a standardised basis to a large
population of customers or users (online search engines, social media platforms, cloud
computing services, etc.)
Consumer facing business
• Businesses that generate revenue from the sale of goods and services of a type commonly
sold to consumers (e.g. personal computing products, clothes, branded foods, franchise
models, automobiles)
• Intermediate products and components - out of scope (with possible exception)
Specific considerations
• Extractive industries, commodities, financial services sector, and international traffic
20
The New Taxing Right (Amount A):
Scope (section 3.1)
Thresholds
• Limited to MNE Groups that meet a certain gross revenue threshold. This
threshold could, for instance, be the same as for CbC reporting (i.e. MNE
groups with gross revenue exceeding EUR750M)
• Consideration will be given to:
• aggregate in-scope revenue threshold
•
de minimis threshold
21
The New Taxing Right (Amount A):
Nexus (section 3.1)
Significant and sustained engagement with market
• Local in-scope revenue threshold over a period of years
• Commensurate with the size of a market (but with a minimum level)
• For
automated digitalised businesses, the revenue threshold will be the
only test
(scale without mass)
• For
consumer facing business:
additional factors to be considered
Design and simplification option
• To be designed to eliminate (or limit to a bare minimum) any filing and other
tax related obligations.
• Exploration of simplified reporting and registration-based mechanisms (such
as a “one stop shop”)
22
The New Taxing Right (Amount A):
Quantum of Amount A (section 3.2)
A formula based allocation mechanism
• Based on a formula designed to identify the portion of residual profit allocated to
market jurisdictions – consolidated group financial accounts
• Amount A only applies to the portion of profit exceeding a certain level of
profitability – Profit Before Tax the preferred measure to assess this
• Allocation key of sales for allocation of Amount A to market jurisdictions
Further technical work
• Business line and regional segmentation to be explored
• The quantum of Amount A could be weighted for different degrees of digitalisation
• Specific revenue sourcing rules to be consider for different business models
23
The New Taxing Right (Amount A):
Elimination of Double Taxation (section 3.3)
Identify the entity/entities liable
• Entities earning the relevant deemed residual profits
Apply the most effective double tax relief method
• Exemption / credit / corresponding adjustment
Further work required
• Determining the relieving entity(ies)
• Methods for allocating Amount A liabilities
24
The New Taxing Right (Amount A):
Interactions and potential for double counting (section 3.4)
Interactions between A and B
• No significant interaction between Amounts A and B
Interactions between Amounts A and C
• Identifies potential interactions between Amounts A and C
• Notes that no double counting should give rise to double taxation given the
application of the mechanism to eliminate double taxation
25
Amount B: Fixed Return (section 4)
Fixed Return under the Arm’s Length Principle
• Fixed return based on the ALP for “baseline” or routine marketing or distribution
activities performed in a market jurisdiction
• The fixed return would consider differences in region and industry
• Treaty changes will not be required to implement Amount B
Further technical work
• Definition of baseline activities / profit level indicator / fixed % at an agreed profit
/ benchmarking studies / industry or region differentiation
26
Tax certainty (section 5)
Dispute prevention and resolution
• Tax certainty is an essential element of the unified approach and is a
fundamental part of the design of Pillar One
Dispute prevention and resolution under Amount A
• Disputes will likely affect the taxation of Amount A in multiple jurisdictions
• Agreement that a new effective and binding dispute prevention and resolution
mechanisms is required for amount A
27
Tax certainty (section 5)
Dispute prevention and resolution under Amounts B and C
• Core of the work on tax certainty and dispute prevention and resolution for
Amounts B will be to limit disputes by using fixed rates of return on baseline
distribution and marketing activities
•
Amount C will involve:
– exploring innovative approaches to dispute resolution
– reaching agreement on the breadth of the application of new enhanced
dispute resolution is critical and IF members agree to return to the matter as
part of arriving at a consensus-based solution in 2020
– also enhancing MAP and domestic measures
28
Implementation and
administration (section 6)
General implementation aspects
• New multilateral convention for coordinated, consistent and effective
implementation
• Compliance and administrative costs, novel compliance requirements, transition
rules
• Commitment by members of the Inclusive Framework to implement this
agreement and at the same time to withdraw relevant unilateral actions
Alternative Global Safe Harbour Approach
• Electing MNE group would agree, on a global basis, to be subject to Pillar One
29
PROGRESS REPORT ON
PILLAR TWO
30
Pillar 2 - GloBE proposal
Income
inclusion
Switch-over
rule
rule
Income inclusion rule (IIR)
Income not
subject to tax at
Switch-over rule
a minimum rate
Undertaxed payments rule (UTP)
Undertaxed
Subject to
payments
tax rule
rule
Subject to tax rule
31
Timeline
Inclusive Framework
Programme of Work
Policy Note
May 2019
January 2019
Working Party and Focus Group
Meetings from June onwards
Consultation on P1 and P2
2nd Public Consultation
Progress Note
February / March 2019
December 2019
January 2020
32
Status of work
Good technical progress on many aspects of Pillar
Two but significant work remains
• Ongoing constructive discussions on various policy and design options
• Close coordination between the relevant working parties drawing on:
• Input from stakeholders in March and December Public consultation
• Work of expert group on financial accounting on the determination of
the GloBE tax base
• IF acknowledges the valuable input from stakeholders and the implications
of the short time-line
33
IIR and UTP Rules
IIR draws on the design of CFC rules
• Top-up to an agreed minimum rate calculated as fixed percentage
• Protecting both the tax base of the parent jurisdiction as well as other
jurisdictions where the group operates by reducing the incentive to
allocate income for tax reasons to low taxed entities
UTP Rule
• Denial of deduction or equivalent adjustment in relation to intragroup
payments
• Complements the IIR
34
Key design issues IIR & UTP
Tax base
• Use of financial accounts as a starting point
• Mechanisms to address temporary differences
UTP Rule
• Adjustments for permanent differences
A number of design options
Blending
under consideration also
designed to limit complexity,
• Options still being considered
compliance and administration
costs and the risk of over-
Carve-outs
taxation
• FHTP
• Substance carve-outs
35
Subject to Tax & Switch- Over Rules
Subject to tax rule (STT rule)
• Subjects a payment to withholding or other taxes at source and denies treaty benefits
• Options and issues being explored to design a simple and targeted rule
• Further consideration on scope of payments covered, the design of the minimum tax rate test
and other key aspects
• Exploration of the application of the STT rule to unrelated parties on interest and royalties
Switch-over rule
• Design of a rule to ensure that the IIR applies to foreign branches that are exempt under tax
treaties, turning-off the benefit of such exemption where that income is subject to a low ETR
36
Rule coordination, simplification,
thresholds, international obligations
Co-ordination with other
Simplifications to reduce
rules (including existing
compliance costs
BEPS measures)
Thresholds
• possible thresholds (such as the
Compatibility with
EUR 750 million revenue
international obligations
threshold used for CbC reporting)
37
ECONOMIC
ANALYSIS
38
Main caveats
Results will ultimately depend on Pillar 1 and Pillar 2 design and to be
decided by the Inclusive Framework
• Further revisions will be made to reflect future design decisions
• Current estimates assume that Pillar 1 is not a “safe harbour” regime
Underlying data have limitations
• Due to gaps in coverage and time lags and the methodology inevitably
involves simplifying assumptions
Refinements are still ongoing to improve data quality, in cooperation with
Inclusive Framework members
Potential strategic reactions of MNEs & governments
• For Pillar 2, some of these reactions have been modelled in the assessment
• These reactions are difficult to anticipate with certainty
39
Overall impact on global tax revenues would be
significant
The combined effect of Pillars 1 & 2 would lead to a significant
increase in global tax revenues
• The
revenue gains are broadly similar across high, middle and low-
income economies, as a share of corporate tax revenues
• The reforms are expected to lead to
a significant reduction in profit
shifting
Failure to reach a consensus-based solution would lead to further unilateral
measures, more uncertainty and more trade disputes
40
In addition to reallocating taxing rights, Pillar 1 would
slightly increase tax revenues
•
Global tax revenues would slightly increase as some taxing rights shift
from low-tax jurisdictions to higher-tax jurisdictions
•
Most economies would experience a
small tax revenue gain
• On average,
low and middle-income economies would gain relatively
more revenue than advanced economies
•
Investment hubs would experience
some loss in tax revenues
•
More than half of the profit reallocated comes from
100 MNE groups
41
Pillar 2 would raise significant tax
revenues and reduce profit shifting
Pillar 2 would raise a significant amount of additional tax revenues
• The amount will depend on the rate and the design
The reform would reduce profit shifting
• Pillar 2 would reduce tax rate differentials between jurisdictions and
reduce the incentives for MNEs to shift profit
• This will be important for developing economies as they tend to be more
adversely affected by profit shifting than high-income economies
42
Investment impact
•
The direct effect on investment costs is expected to
be small in most countries
•
The reforms would reduce the influence of corporate
taxes on investment location
•
The failure to achieve a consensus-based solution
would lead to more unilateral measures, uncertainty
and trade disputes
43
Stay tuned!
Upcoming OECD Tax Talks on 13 February (14.00-15.00 CET)
on Economic Analysis and Impact Assessment
Ask questions and comment throughout the webcast via e-
mail or Twitter:
xxx.xxxxxxx@xxxx.xxx
#OECDTaxTalks
44
NEXT STEPS
45
Ambitious schedule
2020
End of 2020
1-2 July
22-23 February
18-19 July
29-30 January
Inclusive
21- 22 November
G20 Finance
Framework
Inclusive
Ministers Meeting,
Meeting, Berlin,
G20 Finance
G20 Leaders
Framework
Riyadh,
Germany
Ministers Meeting,
Summit, Riyadh,
Meeting, Paris,
Saudi Arabia
“agreement on the
Jeddah, Saudi Arabia
Saudi Arabia
France
Endorsement of
key policy features
progress made
of a solution”
46
THANK YOU!
QUESTIONS?
47
Document Outline