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OECD’s recommended ‘unified approach’ to the digital economy can’t come soon enough

14 October 2019

Last week the OECD announced its latest proposals to address the tax inequalities that the digital economies create under the current international tax systems, whose roots were established over 100 years ago.

The OECD had initially considered the benefits of three different profit allocation models – “user participation”, “marketing intangibles”, and “significant economic presence”. Each was supported by different groups of countries.

Ross Robertson, Tax Partner at BDO said “The OECD’s proposals on allocating profit to different countries in which an international company makes sales or derives value look like a sensible political compromise.”

The Unified Proposal would give countries the right to tax profits of international businesses (regardless of whether they have a base in the country or not) based on calculating up to three separate pots of profit:

  • A share of the companies “residual profit” on a global basis which is allocated to each country as a % of its local sales.
  • A fixed profit element based on local activity in the country
  • A top-up on the fixed profit element where justified under the existing ‘arms-length’ transfer pricing rules used to calculate local taxable profit. 

Ross Robertson says “The proposal doesn’t dispense with the arms-length principal but it goes beyond it in certain respects with a greater attribution of profit to market (ie customer) jurisdictions – address a perceived unfairness in the current rules.

“Of course, international business will likely still consider how best to manage their tax profile on an international scale, but the parameters in which they can do that will be tightened.

“The destination for the international tax rules is now clearer but there remains much detailed work to be done. There are many definitions and technical mechanisms to be agreed: for example, the threshold at which the new rule would apply and the fixed profit element for local activity. And there will be many practical administrative problems to be resolved – not least that the OECD recommends that the new rules take effect globally from one agreed date.

“These proposals seem to focus on consumer facing businesses – yet to be defined - but are broader-based than the UK’s proposed digital services tax. With many other countries impatient to address this rapidly growing tax problem by creating unilateral taxes on digital services, businesses will hope that this unified proposal can be finalised quickly before a diverse set of national taxes are implemented. It might seem complex, but if every country follows one set of rules it will be a level playing field for all businesses.”

ENDS

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