UK and International Tax news

OECD Issues Consultation On Addressing The Tax Challenges Of The Digitalisation Of The Economy

Tuesday 19th February 2019

The OECD has issued a consultation document and is seeking public comments on possible solutions to the tax challenges arising from the digitalisation of the economy, following the issue of their policy note on 29 January 2019.

Following the mandate by G20 Finance Ministers in March 2017, the Inclusive Framework on BEPS, working through its Task Force on the Digital Economy (TFDE), delivered an Interim Report in March 2018 on The Tax Challenges Arising From Digitalisation.  One of the important conclusions of this report is that members agreed to review the impact of digitalisation on nexus and profit allocation rules and committed to continue working together towards a final report in 2020 aimed at providing a consensus-based long-term solution, with an update in 2019.

Since the delivery of the Interim Report, the Inclusive Framework has intensified its work and several proposals emerged that could form part of a long-term solution to the broader challenges arising from the digitalisation of the economy and the remaining BEPS issues. The work on these proposals is being conducted on a “without prejudice” basis; their examination does not represent a commitment of any member of the Inclusive Framework beyond exploring these proposals.

The condoc includes proposals involving two pillars: the first will focus on how the existing rules, that divide up the right to tax the income of multinational enterprises among jurisdictions, including traditional transfer pricing rules and the arm’s length principle, could be modified to take into account the changes that digitalisation has brought to the world economy. This will require a re-examination of the ‘nexus’ rules, and how to determine the connection a business has with a given jurisdiction, and the rules that govern how much profit should be allocated to the business conducted there.

Proposals based on the concepts of “marketing intangibles”, “user contribution” and “significant economic presence” and how they can be used to modernise the international tax system to address the tax challenges of digitalisation are being considered.

A second pillar aims to resolve remaining BEPS issues and will explore two sets of interlocking rules designed to give jurisdictions a remedy in cases where income is subject to no or only very low taxation, within a “global anti base erosion” proposal.

Interested parties are invited to send their comments on the condoc by 6 March 2019 after which a public consultation will be held on 13 and 14 March 2019 in Paris as part of the meeting of the Task Force on the Digital Economy.


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