International community makes important progress on tax challenges of digitalisation


The tax challenges of the digitalisation of the economy were identified as one of the main areas of focus of the Base Erosion and Profit Shifting (BEPS) Action Plan, leading to the 2015 BEPS Action 1 Report (the Action 1 Report). The Action 1 Report found that the whole economy was digitalising and, as a result, it would be difficult, if not impossible, to ring-fence the digital economy.

The Action 1 Report also observed that, beyond BEPS, the digitalisation of the economy raised a number of broader direct tax challenges chiefly relating to the question of how taxing rights on income generated from cross-border activities in the digital age should be allocated among countries.

The international community has just made important progress toward addressing the tax challenges arising from digitalisation of the economy and has agreed to continue working multilaterally towards achievement of a new consensusbased long-term solution in 2020.

Countries and jurisdictions participating in the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) will step up efforts toward reaching a global solution to the growing debate over how to best tax multinational enterprises in a rapidly digitalising economy.

Renewed international discussions will focus on two central pillars identified in a new Policy Note released after the Inclusive Framework’s January 23-24 meeting, which brought together 264 delegates from 95 member jurisdic- tions and 12 observer organisations.

The first pillar 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-examina- tion of the so-called ‘nexus’ rules – namely 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.

The Inclusive Framework will look at 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. 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.

Given the significance of the new proposals for the international tax system, the Inclusive Framework will issue a consultation document that describes the two pillars in more detail, and 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. Further details on the consultation process, including how stakeholders can provide input and most effectively participate, along with the consultation document, will be published in the coming weeks.

“The international community has taken a significant step forward toward resolving the tax challenges arising from digitalisation,” said Pascal Saint-amans, director of the OECD Centre for Tax Policy and Administration. “Countries have agreed to explore potential solutions that would update fundamental tax principles for a twenty-first century economy, when firms can be heavily involved in the economic life of different jurisdictions without any significant physical presence and where new and often intangible drivers of value become more and more important.”

“In addition, the features of the digitalised economy exacerbate risks, enabling structures that shift profits to entities that escape taxation or are taxed at only very low rates. We are now exploring this issue and possible solutions,” SaintAmans said.

Members of the Inclusive Framework renewed their commitment to reaching a consensus- based, long-term solution in 2020, with an update to be presented to the G20 during 2019. In addition to discussions on digitalisation, the Inclusive Framework finalised a report on BEPS Action 5 (Harmful Tax Practices), which has also been released today.