Options proposed would modify longstanding rules and would seek to address base erosion by generally requiring a global minimum tax.
The Organisation for Economic Co-operation and Development’s (OECD) latest consultation document reaches far beyond a focus on digital taxation to present options that could sweep in many industries and companies that would not consider themselves “digital.”
Options proposed would modify longstanding nexus and profit allocation rules and would seek to address base erosion by generally requiring a global minimum tax. The United States has become a key player in the discussions around these OECD proposals. Given the far-reaching implications of the proposals, this is an area US multinational companies should closely monitor.
OECD consultation document
The OECD’s latest consultation document outlines a two-pillared approach to the issues. The first part would reframe the rules on how to determine the connection between a business and a given tax jurisdiction (nexus) and how much profit should be allocated to the business conducted there. Within this category, the OECD is examining three proposals, which the consultation document generally describes as follows: 1
- User participation: Focuses on the value created by developing user bases and would modify current profit allocation rules to require that certain businesses’ profits be allocated to jurisdictions in which their user bases are located, “irrespective of whether those businesses have a local physical presence”; the OECD suggests that the value would be most significant among businesses such as social media platforms, search engines and online marketplaces
- Marketing intangibles: Affects a wider range of businesses than the user participation proposal, and would involve modifying current transfer pricing rules and tax treaties to require that marketing intangibles and risks associated with such intangibles be allocated to the market jurisdiction, which would be entitled to tax some or all of the associated income
- Significant economic presence: Assumes a taxable presence in a jurisdiction when a nonresident business has a significant economic presence based on factors that show a “purposeful and sustained interaction with the jurisdiction via digital technology and other automated means”
The second part of the OECD’s approach would address remaining BEPS challenges of risk and profit shifting with two interrelated rules to be implemented through changes to countries’ laws and tax treaties:
- An income inclusion rule: Acts as a minimum tax and would require a corporate shareholder to bring into account a proportionate share of the corporation’s income if that income were subject to a low effective tax rate
- A tax on base-eroding payments: Complements the income inclusion rule and would deny a deduction for a payment to a related party if the payment were not subject to a minimum tax rate; would include a rule in tax treaties denying certain treaty benefits if the income were not sufficiently taxed in the other jurisdiction
The OECD’s goal is for the Inclusive Framework on BEPS — a group of 129 participating countries — to agree on and make public the final consensus outcomes by the end of 2020, with discussion drafts released for public comment along the way. The timeline leading up to the target date includes plans for comment letter review, steering group meetings and development of a project work plan. Once the work plan is adopted, the OECD working parties will begin what was described as the “hard technical work.”
While it is too early to predict whether consensus will be reached and, if so, what steps would be needed for the policies to become binding within the countries that adopt them, substantive elements of the current proposals have the support of key OECD member countries beyond the United States, including Germany, France and the UK.
As the OECD proposals go through additional scrutiny and refinement, multinational companies should determine how these proposals might affect them. Businesses that have input to share need to decide if and how to engage with policymakers, whether through trade groups or by engaging with policymakers who are involved in the OECD discussions.