The OECD released the Programme of Work to Develop a Consensus Solution to the Tax Challenges Arisin
Following the efforts begun in 2015 with the report “Addressing the Tax Challenges of the Digital Economy, Action 1”, the OECD recently published a new program of work oriented to discuss the new approaches towards taxation in digital era. Among other challenges, the program identifies two main pillars that need to be addressed in order to establish an appropriate policy framework for taxation in 2020. The first pillar is about the need to transform the laws governing Revised Nexus and Profit Allocation Rules. The second pillar, proposes a new Global anti-base erosion policy that aims to coordinate jurisdiction’s rights over taxes.
These two pillars share the concern that globalization has increased cross-border transactions in places where there is a lack of physical presence of corporations, which makes it more complex to determine how to allocate tax rights over those transactions. And, in addition, they recognize that the need to establish ground rules that coordinate the taxing activity has incremented due to the propagation of commerce related with intangible goods and services.
Based on these concerns, the report reviews three different proposals with the aim of constructing one unified approach that solves the issues gathered in Pillar 1, these proposals are: the “user participation” proposal, the “marketing intangibles” proposal and the “significant economic presence” proposal. Although they have diverse objectives, the proposals have some common features like the preference to allocate more taxing rights to the jurisdiction of the customer and/or user, or the contemplation of the existence of a nexus in the absence of physical presence.
After the analysis of these three proposals, a description of the unified approach is showed on the report. Basically, according to the report, there are three goals to be fulfilled. First of all, a unified approach towards taxation in the digital-globalized era should contemplate different approaches to determine the amount of profits subject to the new taxing right and the allocation of those profits among the jurisdictions. Secondly, it should design a new nexus rule that would capture a novel concept of business presence in a market jurisdiction reflecting the transformation of the economy, and not constrained by physical presence requirement. Finally, it would be important to include different instruments to ensure full implementation and efficient administration of the new taxing right, including the effective elimination of double taxation and resolution of tax disputes.
As for the Pillar 2, it focuses on the problems that arise from the convergence of jurisdictions over one taxing operation. In order to overcome these problems, the report suggests countries to freely determine their own tax system, but always considering that there are some transactions (e-commerce, for instance) in which other States could also claim jurisdiction. Furthermore, the report recommends the implementation of the following rules: an inclusion rule, a switch over rule, an undertaxed payment rule, and a subject to tax rule.
The application of these rules, alongside with the assessment of the unified approach for Pillar 1, are to be evaluated with the tools proposed by the chapter four of the report. This chapter was written because the members of the Inclusive Framework on BEPS considered necessary to establish mechanisms that undertake a periodical evaluation of the guidelines proposed in the report, this way they would have both theoretical and empirical arguments that support the report in the G20 meeting that is going to take place in 2020 and where taxation is one of the most relevant points in the agenda.
In summary, these report will be extremely useful in the discussions to come about taxation in the digital era. Not only it addresses issues related with the allocation of tax rights, but also opens a debate concerning jurisdiction claims, which is major controversy in a world where borders are getting thinner. Despite its soft law-nature, the work made by the OECD in this report should definitely influence global and national tax regulations in the following years.