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The @OECDtax has released its ‘programme of work’ for getting to a solution on the taxation of the digital economy. I’ll be going through it in this thread, and my full story is here: internationaltaxreview.com/Article/387644… 
The first thing you note in the introduction is that there are big, serious, very-not-easy political questions still to answer. Or, in OECD-speak, "the work programme ... will require an early political steer".
The OECD will carry on with its technical work to support whatever countries decide. But "for a solution to be delivered in 2020, the [political] outlines of the architecture will need to be agreed by January 2020."
Yikes! Not a long time. So what's at stake here for countries to squabble over? How wide does this actually go?
Let’s start with Pillar 1 – profit attribution and nexus. You’ll remember the three proposals from the consultation: user participation (pushed by the UK), marketing intangibles (USA) and significant economic presence (India).
(Here’s my thread on the consultation document from the time.)
Things have changed on this. You won’t find the terms ‘user participation’, ‘marketing intangibles’ or ‘significant economic presence’ in this document (except once, referring back to the consultation doc).
Instead, there’s an attempt to emphasise what those approaches have in common – and how they could potentially be combined – by separating the ‘profit allocation’ part of Pillar 1 from the ‘new nexus rules’ part.
What are the options for profit allocation? The first is ‘modified residual profit split’. Like the old marketing intangibles proposal, it separates off nonroutine (or ‘residual’) profits that will be subject to a new taxing right.
But this proposal is broader than the old marketing intangibles one, bc the portion of nonroutine profit subject to the new right, and its allocation between countries, is left to be determined. It could be intangibles-based, or it could be formulary.
Ultimately the main substance of ‘modified residual profit split’ is: however this new taxing right is gonna work, it’s going to be LIMITED to a section of nonroutine profits – and we’ll stick with transfer pricing and the ALP for taking care of the rest.
Then comes the ‘fractional apportionment method’.
Here, there no distinction between routine and nonroutine profits. We’re talking about all profits in the group or business line. How do you calculate that? Maybe by using current TP rules; maybe by “applying a global profit margin to local sales”; maybe some other way.
Then you come up with an allocation formula, with keys. Absolutely no indication what they would be.
(Perhaps users could be one? Worth noting that the UK’s user participation proposal has had very very little of an impact on this document, from what I can see. But as one of several allocation keys? It’s plausible.)
But I just want to take a moment for this to sink in. A working group – ‘Working Party 6’ – will now begin detailed technical work on measures that basically could amount to global FA … at the OECD!
We now move to ‘distribution-based approaches’. I’m not the only one who has spotted this is suspiciously similar to the ideas put forward by Johnson & Johnson during the public consultation.
The idea here is to throw some more profit toward market jurisdictions, but do it in a simpler way than with the residual profit split. You can “specify a baseline profit in the market jurisdiction for marketing, distribution and user-based activities”, and then adjust …
… using a couple of levers “to accommodate, for instance, industry and market differences”.
There you have it: the new three options for Pillar 1. Just want to take a step back. What can we read into the evolution of the old three options into the new three?
Some (like @phdskat) saying this means the OECD is ‘zooming out’ and considering a more fundamental rethink of the international tax rules. I think there is some merit to that. But I also wonder if this is just a reflection of the fact countries are really deeply divided on this.
It’s brave and bold – and what the OECD does – to try and find common ground between the different approaches. The way to do that is to jump up to a more conceptual level, as they have done here. But at some point they have to come back down – to details.
When that detailed work happens, will countries be able to find any consensus? Remains very much to be seen.
And on that note let’s look at the section on new nexus rules, because this is the real lacuna of the document.
There is some admirable thinking about mechanisms for implementing new nexus rules. Tax treaties will need changing: either to expand the definition of PE in articles 5 and 7 of the OECD Model Convention, or to add a new clause.
But the doc never gives the remotest indication of what measures might be used, or what are even being considered, to establish the new nexus. The closest it comes: nexus “where an MNE exhibits a remote yet sustained and significant involvement in the economy of a jurisdiction”.
🤷♂️
There follows a section on administration. How will a company pay tax to a jurisdiction where it has no conventional permanent establishment?
The preferred option is to develop “simplified registration-based collection mechanisms”, which could be based on the tech currently being used for country-by-country reporting.
Though withholding taxes are also mentioned as a potential mechanism, “where it does not lead to double taxation”.
There are some other things mentioned: work will be done to make sure proposals avoid double taxation and give thought to how losses should be treated. (Either by profit–loss symmetry or an ‘earn-out’ approach.)
That’s it for Pillar 1. On to Pillar 2, which now has a new name: the Global Anti-Base Erosion Proposal, or … GloBE 🌏 🤔
There is an admission that this is not really digital economy work, except inasmuch as it’s being done at the same time and by the same people as the digital economy work. “The scope of the anti-base erosion proposal is not limited to highly digitalised businesses.”
The actual substance of the income inclusion rule, tax on base-eroding payments, and subject to tax rule – basically amounting to rules to prevent undertaxation of corporate profits – haven’t changed much.
One not-that-surprising development: it seems the global minimum tax rate will end up being a fixed number. Not tied to various countries’ corporate tax rates, but a single global number. (Of course, there’s no indication of what that number is.)
However what is fascinating here is the subtext, which clearly indicates massive disagreements among countries. Some countries have clearly insisted on language that queries the whole basis for the GloBE measures.
“Certain members” think BEPS needs to go further to tackle profit shifting and undertaxation. Then in a footnote: “Other members” think GloBE “May affect the sovereignty of [low- or no-tax] jurisdictions.”
🤔
OECD is told to explore the impact of a carve-out from the inclusion rule for “regimes compliant with the standards of BEPS Actuon 5”. Yet as the document itself points out in the next clause, “such carve-outs would undermine the policy intent and effectiveness of the proposal”!!
And that’s my final takeaway: countries are divided. The OECD’s technical work may help them find agreement. But there’s no guarantee of that.
A last thought: the conceptual audacity of some of the Pillar 1 ideas the OECD will now work on is an indicator that countries are very far apart on attitudes to international tax, and some believe that a rethink of the whole system is needed.
But the audacity of thought in the document will not translate directly into audacity of ACTION – in fact, as an indicator of the divisions between countries, it could signal the opposite: disagreement and stasis. Meanwhile, clock is ticking.
Still, I can’t help but feel excited. Fundamental tenets of the international tax rules are being questioned. This moment, where things seem wide open, could be an extraordinary chance to remake them. Time will tell – now it’s over to the politicians.
Once more, my story here – free to read on @IntlTaxReview: internationaltaxreview.com/Article/387644…
As per, I've messed up the threading. 🙄 To make sure you get the whole thread, click through from here:
