At the end of January, the members of the Inclusive Framework (IF) met to discuss the OECD’s two pillar approach on taxing the digital economy. In this meeting, the IF voiced its support for a multilateral agreement on both pillars and endorsed further work in a still very ambitious timeline – the aim is to reach political agreement on a consensus-based solution by the end of 2020.
Following the meeting, the IF released a statement on the two-pillar approach. The statement – which mainly deals with pillar one (for further details on the two pillars see here) – includes the following:
- an agreed outline of architecture of the unified approach (pillar one, ie new taxing rights for market jurisdictions requiring calculation of so-called amounts A, B and C – for further details on amounts A, B and C, see here)
- a revised Programme of Work on pillar one; and
- a short progress note on pillar two (recognising that significant work still needs to be done but nor providing any further details).
The outline of architecture sets out the main building blocks of the unified approach, highlights the areas of work still to be done but does not provide a solution yet. Main points discussed include the following:
- Scope – most notable developments are on scope. Aside from consumer facing businesses (being defined by the product (goods or services) sold and not by their position in the distribution chain), also automated digital services (eg cloud computing) may be within the scope of pillar one. Businesses selling intermediate products or components should be out of scope. Further, thresholds both for being within scope and for creating nexus to a specific market jurisdiction as well as carve-outs will have to be identified – the statement in its Annex A includes a graphic overview of how to identify whether an amount A needs to be determined or not.
- Calculation of amounts – on amount A, one new feature to be explored relates to 'digital differentiation', ie adjustments to the formulaic apportionment depending on the degree of digitalisation of the MNE. Overall, calculation of amounts A and B and their interaction require further work. Amount C is not discussed other than in connection with the work that still needs to be done on the interaction of the three amounts and possible dispute resolution mechanisms.
- Effective dispute resolution – there is agreement that the unified approach requires sound and robust dispute resolution mechanisms. Therefore, the outline puts a lot of focus on dispute prevention and resolution. The use of mandatory binding arbitration is being discussed, eg in the context of determining amounts A and C. However, as some jurisdictions have domestic barriers to adopting such mechanisms, innovative solutions may be required, eg by setting up a representative panel of experts.
- Safe harbour – applying pillar one as a global safe harbour system (as proposed by the US) will be considered as an alternative under the revised Programme of Work.
- Implementation – it is very likely that a new multilateral convention will be required as well as domestic law changes in order to implement pillar one.
On unilateral digital tax measures it is expected that any consensus-based approach will include a commitment by the IF members to withdraw these.
Although a lot of work still needs to be done, 2020 may well mark the beginning of some fundamental changes to principles of global taxation.