OECD with public consultation proposal on taxation of digital economy
The secretariat of OECD released a proposal 9 October taking an aim at corporate income taxation of multinational tech entities. If the proposal is adopted by the member countries of OECD, it will result in a radical change of taxation of such entities.
The proposal is a result of OECD´s BEPS project and OECD´s continuous work on proposing solutions to the challenges relating to taxation of the digital economy. One of the major challenges for countries is to tax income of companies with high consumer market shares but with low or no physical presence in the relevant countries. Under current tax treaties based on the OECD Model Tax Convention, the lack of physical presence in a jurisdiction usually results in little or no local taxation for tech companies that can operate in multiple jurisdictions without physical presence.
In brief, OECD suggests to re-allocate certain profits and corresponding taxing rights to countries and jurisdictions where multinational entities have their markets, and would not depend on physical presence in the user/market jurisdiction:
- The scope of the proposal is consumer–facing businesses. From the Norwegian petroleum industry´s perspective, it should be noted that extractive industries are assumed to be out of the scope.
- Businesses within the scope will be taxed in jurisdictions largely based on their sales (and not only their physical presence). It is expected that certain thresholds for taxation will be introduced.
- Profit allocation for businesses within the scope of the proposal would go beyond the arms´ length principle and beyond the limitations of taxing rights determined by reference to a physical presence, two principles generally accepted as cornerstones of the current rules. At the same time, the approach largely retains the current transfer pricing rules based on the arm’s length principle but complements them with formula based solutions. For businesses within the scope, profits will be allocated under a three-tier mechanism, ensuring taxation both in the market countries and the home country of the taxpayer:
- Amount A – a share of deemed residual profit allocated to market jurisdictions using a formulaic approach (i.e. the new taxing right);
- Amount B – a fixed remuneration for baseline marketing and distribution functions that take place in the market jurisdiction, in line with existing rules (e.g. transfer pricing under the arm’s length principle and permanent establishment allocation under Article 7); and
- Amount C – binding and effective dispute prevention and resolution mechanisms relating to all elements of the proposal, including any additional profit where in-country functions exceed the baseline activity compensated under Amount B.
Noting that this is currently just a proposal, the OECD suggests in the public consultation document that certain aspects should be further discussed, inter alia whether some sectors (e.g. the financial sector) should be carved out, what thresholds should be applied etc.
The proposal is now open to a public consultation process. Interested parties are invited to send their comments no later than Tuesday, 12 November 2019. Consultation meetings will be held on 21 and 22 of November in Paris. The aim is to have a solution delivered by 2020. The public consultation document can be found here.