One of the prime aims of the OECD is the fight against tax avoidance through Base Erosion and Profit Shifting (BEPS) particularly in markets involving the digital economy. The most recent development in the area was the publication of the proposal for public consultation on the allocation of taxing rights and profits in the digital economy.
OECD proposals for the taxation of the digital economy
In this proposal, it is being proposed that a two-pillar approach should be adopted to address the tax challenges of digitization.
Pillar One, the Unified Approach, focuses on what tax should be paid and on what portion of profits should be taxed in each jurisdiction where the taxpayer has a presence. The aim of this approach is that multinational entities (MNEs) conducting business in jurisdictions where they do not have a physical presence can be taxed in such jurisdictions.
Pillar Two, referred to as the Global Anti-Base Erosion, calls for the development of a coordinated set of rules to address ongoing risks from structures that allow MNEs to shift profits to low or no-tax jurisdictions. Under this approach, the OECD is proposing a minimum level of taxation which would apply to MNEs.
An economic analysis is being undertaken to assess how these two pillars will be effecting global tax revenue. From preliminary analysis, it results that Pillar One reform would bring a small revenue gain to most jurisdictions since it aims to reallocate some taxing rights to market jurisdictions irrespective of the physical presence of the companies.
On the other hand, pillar two reform could raise a significant amount of additional tax revenues since, by reducing the difference in tax rates, MNEs will not have any reason to shift the profits from one jurisdiction to another.
These proposals are not expected to have a major effect on the cost of investment in the industry since the reforms target companies with high levels of profitability and low effective tax rates. However, these reforms will definitely have an impact on the decision where investment should be located since the corporate tax will no longer be a determining factor in such decision processes.
The OECD is urging its member countries to reach a consensus on the implementation of the proposed measures as these will result in harmonization amongst countries and will reduce uncertainty for companies.