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Article:

Global digital tax reform – OECD work plan

06 June 2019

The OECD has published its work plan to ‘Develop a Consensus Solution to the Tax Challenges Arising from the Digitalisation of the economy’. For an outline work plan to run to 44 pages might seem a bit like overkill: but when the task is to overhaul the way that global business taxation functions it is perhaps no surprise that there is lot of work to be done!

Building on its prior proposals for a global digital tax reform, the work plan sets out the key steps towards:

  1. A “political agreement on the objective and scope of a unified approach” to ‘pillar one’ of its proposals, ie negotiate over which three suggested methods of taxable nexus a transnational profit allocation (the user participation model, the marketing intangibles model or the significant economic presence model) has the broadest support to “…facilitate a political agreement”
  2. Analysing the best way to achieve the pillar two proposal for a global effective minimum tax (the ‘GLoBE’ proposal) by exploring the need for an income inclusion rule, a switch over rule, an undertaxed payment rule, and a ‘subject to tax’ rule
  3. Providing full economic analysis of the proposals and their likely impact.

Alongside pillar one, the design of a new taxable nexus rule will have to account for the fact that in the digitised economy a business need not have a connection with a country (as recognised under the current rules) yet can still create profits from customers in that jurisdiction. In such circumstances, there will need to be new (reciprocal) tax enforcement and collection arrangements so that each jurisdiction can actually gather the tax to which it is entitled under the new rules as well as mechanisms to prevent double taxation or a liability arising where no economic profit arises.

Timeline

Throughout 2019, there will be 7 groups from the BEPS programs working concurrently on the issues, the supporting analysis and the implementation process. This is intended to allow rapid movement towards achieving a consensus: a report on the progress of the work is expected in December 2019 and agreement on the architecture of the consensus solution is called for by January 2020. Whether this is a realistic timeframe given that there are 129 member states of the Inclusive Framework on BEPS remains to be seen.

If a consensus can be achieved early in 2020, it is then envisaged that a further year of work will be needed on the technical details to deliver a final report of refined proposals by the end of that year.

BEPS implementation has proved to be successful so far and we would expect that implementation of the necessary changes to double tax agreements to tackle digitisation of the economy will also be achieved by some form of Multilateral Agreement. Even then, it may then be a further two or three years before the new proposals begin to take effect: the G20 countries are likely to be early implementers (although political difficulties – particularly with the USA - may extend the timeline).

However, given the enormity of the task, overhauling the international tax regime by, say, 2022 remains a short timescale and international groups should keep a keen eye on developments: if the OECD’s work plan does bear fruit, the tax liabilities of most groups could change radically in just a few years and create new financial drivers for their business structures. 

If you would like some guidance in assessing how your business might be affected as the international tax landscape changes please do not hesitate to get in touch with your usual BDO contact or Ross Robertson.

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