When the OECD announced its working programme for resolving the tax challenges arising from the digitalisation of the economy in May 2019 (see our blog and briefing for further details on the concepts underlying its two 'pillars'), the timetable seemed ambitious.

But so far, the OECD keeps on delivering on its self-imposed timeline – with the latest accomplishment being the publication on 9 October 2019 of its Secretarial Proposal for a “Unified Approach” under Pillar One (PDF). (Public consultation is open until 12 November 2019.) Overall, the OECD aims to have a package ready by January 2020 for the Inclusive Framework to find consensus. This package will also include a proposal on Pillar Two, on which a paper will be published in November 2019 with public consultation commencing afterwards.

What does the secretarial proposal contain? The paper revolves around the 'unified approach', which is supposedly based on the commonalities of the three competing Pillar One approaches previously discussed (user participation, marketing intangibles and significant economic presence). It is hoped that the unified approach will help get consensus by breaking the deadlock around the three proposals. Rules on scope, new nexus and new profit allocation (by applying a three-tier-mechanism) are being explored – all unfortunately without in-depth analyses or descriptions:

  • On scope, the target will be large consumer-facing businesses, with 'large' possibly to be determined by revenue thresholds. Extractive industries and financial services could be excluded.
  • The new nexus rule will not rely on physical presence, but on a sustained and significant involvement in a market jurisdiction, eg by reference to revenue thresholds. It will be a standalone concept and will apply alongside the 'permanent establishment' concept.
  • For new profit allocation, a three-tier-mechanism is being proposed:
    • Amount A – deemed residual profit: this is calculated by taking total profit, excluding a fixed percentage for deemed routine profit, and then allocating a portion of deemed residual profit to market jurisdiction.
    • Amount B – fixed remuneration: this is to remunerate baseline marketing and distribution functions in the market jurisdiction.
    • Amount C – adjustment mechanism: this should allow adjustments to the above where the activities in the market jurisdiction justify additional profit being attributed there.

The arm's-length principle will be retained where it works well but will be supplemented by formulae in areas that are causing tension (ie around determining residual profits).

Focus on getting political agreement is strong. But now the question is: what will 'the public' say?