An OECD working party will begin detailed technical work on
three profit-allocation proposals, including fractional
apportionment at the level of the multinational group, after
the organisation’s Inclusive Framework of 129
countries approved a 'programme of work’.
The document, which does not substantially narrow down the
options being considered for taxing the digital economy, was approved at the OECD’s Paris
headquarters on May 28.
The OECD's efforts to tax the digital economy have been extensively covered in ITR.
ITR's taxpayer survey on digital economy taxation
is open for responses until Tuesday, June 4.
The 'Programme of Work’ will be presented to
G20 ministers in Fukuoka, Japan, next week for their
It hints at a group of countries striving for consensus but
still unable to reach agreement on some of the key issues. As a
result, it instructs OECD working groups to do technical work
on a range of options.
One of these is the worldwide fractional apportionment
championed by India and other developing countries.
But the Inclusive Framework insisted that the
OECD’s technical work cannot be a substitute for
discussion of politically sensitive tax questions
between countries. The document sets a deadline of January 2020
for countries to address the remaining political questions and
to establish "the outlines of the architecture" for a new
international tax system.
Profit-allocation proposals evolve
The OECD’s consultation document had suggested
three different Pillar One proposals: 'user
intangibles’, and 'significant economic
presence’. Public comments laid bare the lack of agreement among companies on which
proposals would work best.
The new programme of work discards these phrases and
organises the ideas differently.
It attempts to highlight the common ground between the
different proposals by splitting them up into
'profit-attribution’ and 'nexus’
The report outlines three profit-attribution proposals:
1. Modified residual profit
split. This method, like the former 'marketing
intangibles’ proposal, calculates a
business’s nonroutine profits and allocates some
or all of those profits to different jurisdictions –
either using modified transfer-pricing rules or a formulary
method. This proposal would keep the current transfer-pricing
rules in place.
apportionment. This method would determine the entire
profit of the group and then use a set of allocation keys
– presumably including some that capture remote
digital activity – to apportion the profit to the
different countries in which the group operates.
approaches. This proposal, which appears strongly
similar to the proposal advanced during the public
consultation by Johnson & Johnson, aims to use a simple
formula to specify "a baseline profit in a market jurisdiction
for marketing, distribution and user-related activities" in
order to move more taxable profit towards market
Nexus: no indication of what will replace physical
Companies only pay tax in jurisdictions where they have a
physical permanent establishment (PE).
The Inclusive Framework has agreed that this has to change,
but gave little indication of what will replace it.
The closest it came was in a sentence that suggested one way
of implementing new nexus rules would be to amend articles 5
and 7 of the OECD Model Convention to deem that there is PE
"where [a company] exhibits a remote yet sustained and
significant involvement in the economy of a jurisdiction".
The document is silent as to what factors might make an
economic involvement "sustained and significant". Yet this is
sure to be one of the central issues that the OECD will have to
resolve in future technical and political work.
Pillar Two: a new name, but no consensus
The document suggests that countries are far from reaching a
consensus on the Pillar Two rules, which it refers to under the
new name of the "global anti-base erosion", or GloBE,
Observers have likened the GloBE package, which includes a
tax on base-eroding payments as well as a global alternative
minimum tax rate, to the BEAT and GILTI provisions in the
US’s 2017 Tax Cuts and Jobs Act.
The document said that "certain members of the Inclusive
Framework" believe that the GloBE proposals are necessary to
reduce profit shifting to jurisdictions where little or no tax
But, in a footnote, the plan mentions "other members"
– presumably low-tax jurisdictions – who
believe that the GloBE rules "may affect the sovereignty of
jurisdictions that for a variety of reasons have no or low
In other words, the Inclusive Framework is still in the grip
of a debate that ITR reported on in March: whether it is
appropriate to tackle the undertaxation, as well as
the nontaxation, of corporate profits.
One especially tortuous passage seems to show the Inclusive
Framework trying to find a compromise between fundamentally
clashing points of view. The document proposes a carve-out from
the income-inclusion rule for "regimes compliant with the
standards of BEPS Action 5", but then says that "such [a]
carve-out… would undermine the policy intent and
effectiveness of the proposal".
Only three regimes are deemed 'Harmful’ under
BEPS Action 5.
Time for politics
Hinting again at the lack of consensus, the Inclusive
Framework participants agreed that the OECD will require "an
early political steer" to narrow down the range of options it
That "steer" will come both from the G20 and from the
OECD’s BEPS steering group, a group of
representatives from OECD countries and some developing
Political leaders will be informed by economic analyses and
impact assessments of all the options under consideration.
Many will consider what the OECD has already achieved in
this project as a great achievement, producing credible
proposals at a breakneck pace and convening over a hundred
countries to discuss them.
But there’s no way around it: finding political
consensus on a way forward, in the next six months, is a