The OECD yesterday instigated a public consultation on Pillar 1 of the BEPS 2.0 framework. The consultation document outlines the OECD's proposals to recognise a new form of taxable presence ("new taxing right") and new rules for allocating profit to market jurisdictions. The new proposals (referred to as the "Unified Approach"), if/when adopted, will constitute a major change in the international tax environment.
The OECD is pursing BEPS 2.0 under the program of work adopted by the inclusive framework on BEPS and approved by the G20 Finance Ministers in June 2019. 129 countries are participating in the program of work and the OECD is also engaged in a wide ranging consultation process.
The principal aspects of the OECD's proposal for a unified approach under Pillar 1, which the OECD published yesterday, are:
- New taxing right / new nexus definition. The OECD's new nexus proposals go beyond the permanent establishment concept that is central to allocation of taxing rights in almost all double tax agreements. The new taxable presence would be recognised where an entity has sales in another country in excess of a certain threshold. It is not a condition of the new taxable presence that the company has a physical presence in the country.
- New profit allocation rule. The OECD outlines two new forms of profit allocation that will supplement and interact with the arm's length principle that forms the basis for transfer pricing. The first of these rules will allocate a share of group 'deemed residual profit' to market jurisdictions using a formulaic approach. The second of these rules will institute a minimum fixed remuneration for baseline marketing and distribution functions that take place in market jurisdictions.
The new proposals started with a focus on digital companies but it is now clear that the OECD secretariat intends that the final scope will be wider. The OECD references the idea that large consumer-facing businesses should be a central focus of the work.
While the main focus of the new rules will be companies with B2C transactions, also certain B2B interactions will likely be in scope. The OECD also implies that extractive and commodity trading industries and small businesses may be excluded from the scope of Pillar 1. It notes that further discussion should also take place to consider other sectors (e.g. financial services) should also be carved out and/or whether some aspects of the profit allocation rule should vary between industries and/or regions.
The program of work that the OECD is pursuing anticipates that two pillars will be developed. The publication today deals only with Pillar 1. The second pillar considers the introduction of a global income inclusion rule that would tax the income of branches and subsidiaries if that income was subject to tax at an effective rate that is below a minimum rate - and a tax on base eroding payments that would deny tax deductions on certain payments unless the payment was subject to tax at or above a minimum level of tax. A separate consultation on Pillar 2 will be issued in November.
The discussion draft published yesterday outlines the OECD secretariat proposals for Pillar 1 but it is not yet a consensus document outlining the agreed views of OECD or inclusive framework members.
Takeaways
The OECD discussion document was published this morning and within minutes articles began appearing on news sites worldwide. This is a high profile issue and not just a tax technical topic. During the OECD Tax Talk webcast, aired shortly after the release of the discussion draft, a clear communique was issued underlying the strong political will on G7, G20 and overall international level to finalise this new tax framework by end of 2020. Tax departments should consider whether/how to update senior management on the developments.
The new rules, when finalised, will result in more companies paying tax in more countries - and they will result in an increase in the profits taxed in the countries where sales are made and a decrease in taxes paid in other profit centres. Groups should begin to consider, and in some cases model, how they may be impacted. Groups should also consider how/whether to provide comments to the OECD.
The OECD published the document yesterday. PwC will publish further details and reflections in the coming weeks.
