Digital taxation & OECD: On a weak pillar

November 13, 2020 6:00 AM

The OECD Blueprint for Pillar One falls short of the goals mentioned in its Action Plan 1

While technical work on Pillar One is advanced, the Blueprint recognises that it is not a consensus document and that there are several key features of the solution that can only be resolved through political decisions.While technical work on Pillar One is advanced, the Blueprint recognises that it is not a consensus document and that there are several key features of the solution that can only be resolved through political decisions.

By Shweta Pai

The tax challenges pertaining to the digitalisation of the economy have been a contentious issue over the past decade. In recognition of this, the Organisation for Economic Co-operation and Development (OECD) identified it as one of the main areas of focus of the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project, leading to the 2015 BEPS Action 1 report. The Action 1 report called for continued work in the area. The debate and focus peaked when countries started implementing uncoordinated, unilateral measures. India, too, introduced unilateral measures like the equalisation levy and has initiated consultation for draft rules on significant economic presence and profit attribution to permanent establishment for addressing the challenges of digital economy.

In January 2019, the OECD released a policy note that said the renewed international discussions will focus on two central pillars: Pillar One and Pillar Two.

Pillar One will address the broader challenges related to the digitalisation of the economy and will focus on the allocation of taxing rights, and Pillar Two will sort out the remaining BEPS concerns (collectively, BEPS 2 project). After a lot of work and public consultation, on October 12, the OECD released a series of documents in connection with the BEPS 2 project, including a detailed report on the Blueprint on Pillar One .

The aim of Pillar One is to reach a global agreement on adapting the allocation of taxing rights on business profits in a way that expands these rights for market jurisdictions. The OECD Blueprint provides a solid foundation for a future agreement that would adhere to the concept of net taxation of income, avoid double taxation and be as simple and easy to administer as possible.

The Blueprint provides details on various technical work undertaken so far on the key elements, which are grouped into three components: Amount A (a new taxing right to market jurisdictions); Amount B (fixed return for baseline marketing activities); and processes to improve tax certainty through effective dispute prevention and resolution mechanisms. It further indicates that a new multilateral convention is to be developed as the best and most efficient way of implementing Pillar One. The Blueprint identifies eleven building blocks that are considered essential for the construction of Pillar One.

While technical work on Pillar One is advanced, the Blueprint recognises that it is not a consensus document and that there are several key features of the solution that can only be resolved through political decisions. The Blueprint notes that political decisions are required on several issues, including the scope of Amount A, the amount of residual profit to be allocated under the new taxing right, the scope of mandatory binding dispute resolution beyond Amount A, and the scope and application of Amount B.

The reallocation of taxing rights under Pillar One could lead to significant changes in the international tax rules under which multinational businesses operate and could have important consequences on the overall tax liability of businesses and tax revenues of the countries.

In 2015, when the OECD released Action Plan 1 report, it recognised (a) neutrality; (b) efficiency; (c) certainty and simplicity; (d) effectiveness and fairness; and (e) flexibility as the pillars that should guide taxation of the digital economy. Currently, the Blueprint falls short on a number of these principles, and it is, therefore, unclear whether a consensus will be achieved on the various open issues. Thus, it is crucial that OECD recognises this aspect and strives to embed these principles in the final structure, which is expected to be released by mid-2021. In the absence of a consensus, the uncertainty caused by the unilateral measures is expected to add to the tax woes of multinationals.

Given the above, it is important and recommended for MNCs to follow developments closely and consider engaging with the OECD and policymakers at both national and multilateral levels on the business implications.

The author is Tax Partner, EY India. Views are personal

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