G20/OECD work: Maybe way beyond digital
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G20/OECD work: Maybe way beyond digital

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The OECD’s work around the digitalisation of the economy is proceeding at a rapid pace and many multinational enterprises may be surprised at the scope of changes to the international tax framework. These changes could impact all larger multinationals, not just those that consider themselves part of the digital economy.

The G20 is an international forum for the governments and central bank governors from 19 countries and the European Union. G20 finance ministers and central bank governors meet several times a year, and the leaders of these countries convene at an annual summit. This group in setting the path for global tax policy.

Indeed, it was the G20 Leaders' Summit in June 2012 that focused on the need to prevent base erosion and profit shifting (BEPS) and pointed to the OECD to take the lead in this work. By the time of the next leaders meeting in St Petersburg in 2013, the OECD had drafted its BEPS Action Plan, which the leaders fully endorsed at that meeting. The BEPS work proceeded as an OECD/G20 project, so that countries included in the deliberations were expanded to include non-OECD, G20 countries such as Brazil, China and India. Since the release of the final BEPS reports, the project has further expanded to include more than 130 countries functioning as the Inclusive Framework.

Issues surrounding the taxation of the digital economy were deemed so important to the BEPS Action Plan that the topic was designated Action Item 1, and the plan established a dedicated Task Force on the Digital Economy (TFDE).

The Action Plan explained that "[i]ssues to be examined include, but are not limited to, the ability of a company to have a significant digital presence in the economy of another country without being liable to taxation due to the lack of nexus under current international rules, [and] the attribution of value created from the generation of marketable location-relevant data through the use of digital goods and services".

After two years of meetings and consultations at the OECD, the OECD/G20 report on Action 1 issued in October 2015 covered a variety of important areas related to the taxation of the undefined "digital economy". For example, the 2015 final report acknowledged that the digital economy creates challenges for VAT collection, particularly when goods, services and intangibles are acquired by private consumers from suppliers abroad, and recommended actions that countries could take to improve VAT collection in those areas.

With respect to direct taxation, however, perhaps one of the most significant observations in the 2015 final report was that "because the digital economy is increasingly becoming the economy itself, it would be difficult, if not impossible to, to ring-fence the digital economy from the rest of the economy for tax purposes". Due in part to this reality, the 2015 final report made no specific recommendations regarding direct taxation, but noted that it would be important to continue working on these issues and to monitor developments over time, promising a report in 2020 that would reflect this continued work.

In March 2017, the G-20 communiqué from the Baden Baden meeting of the G20 finance ministers and central bank governors requested an interim report from the TFDE by the spring of 2018. In the meantime, in March 2018, the European Commission proposed two directives with respect to the taxation of the digital economy: an interim measure and a longer-term solution.

The EU's proposed interim measure – designed to be in place only until the longer-term solution could be agreed among EU members – consisted of a 3% gross basis tax on revenues received by digital companies of a certain size from sales of advertising and data, or from intermediation services (providing a digital platform between third-party business or consumer users). The longer-term solution would have consisted of a change to the permanent establishment (PE) and profit attribution rules such that digital companies could be subject to tax in a jurisdiction even without a physical presence, and profits could be attributed to the PE based on the perceived value add from users and data.

Neither of the European Commission's proposals ultimately gained the unanimous support required in the EU, and the directive was not adopted. But since the project's lack of success at the EU-wide level, several countries have announced plans to adopt their own versions of digital services taxes (DSTs), thus potentially resulting in a multiplicity of unilateral action unless countries can unite around a more permanent, global income tax-based solution.

It is this search for a longer-term solution that preoccupies the G20/OECD/Inclusive Framework. It produced an interim report in March 2018 as requested by the G20, a policy note released on January 29 2019, and the public consultation document released on February 13 2019. These papers and the related consultations resulted in the Programme of Work to Develop a Consensus Solution to the Tax Challenges Arising from the Digitalisation of the Economy in May 2019 that set the framework for these ongoing discussions.

If the programme of work reaches fruition and is implemented by member nations, it could fundamentally alter the longstanding rules that govern the international taxation of all large multinational enterprises (MNEs), not just those that might consider themselves digital companies.

Why does the work now have such a potentially broad scope? First, as noted, the original BEPS digital report found that it would be "difficult if not impossible" to ring-fence the digital economy. The scope of the work has thus grown to include potentially all cross-border activities of large MNEs. This evolution was also due in part to the views of the US Treasury Department, which repeatedly emphasised that it would not agree to a global solution limited to a particular industry (or one predominantly centred on companies domiciled in the US).

The programme of work calls for "a solution to be delivered in 2020", a timeframe the 130-plus membership of the Inclusive Framework acknowledges is "extremely ambitious" and would require "the outlines of the architecture" to be agreed to by January 2020.

The programme of work, like the policy note released on January 29 2019, and the public consultation document released on February 13 2019, describes a two-pillar approach that could form the basis for consensus.

Pillar 1 focuses on revising the rules for allocating income to market jurisdictions and moving beyond the arm's-length standard, as well as developing related nexus/PE rules that would broaden the circumstances in which a multinational's contacts with a country would grant that country income taxing rights.

Pillar 2 focuses on establishing a global minimum tax along with a backstop regime that would deny deductions or impose withholding with respect to certain payments to low-tax jurisdictions.

Pillar 1: Revised nexus and profit allocation rules

The public consultation document released in February articulated three proposals:

  1. A user participation proposal;

  2. A marketing intangibles proposal; and

  3. A significant economic presence proposal.

Using different methods, each proposal allocated more taxing rights to the customer's and/or user's jurisdiction (the market jurisdiction). In addition, all three proposals contemplated the existence of a tax nexus without physical presence, contemplated using the total profits of a business (not just the profits of the group's entities in a jurisdiction), considered the use of simplifying conventions (including those that diverge from the arm's-length principle), and would operate alongside the current profit allocation rules.

The programme of work released on May 31 explains that it would explore options and issues relating to a modified residual profit split (MRPS) method, a fractional apportionment method, and distribution-based approaches. Specifically, detailed design considerations will look at the use of a residual profit split approach (either on a global or business line/regional basis) alongside existing transfer pricing rules, or the use of formulae or "fractional apportionment" by reference to metrics such as sales, employees, assets, or users. A newly proposed approach considers a base level of return for distribution activities in market countries.

For each of these proposals, the programme highlights the significance of the technical work that needs to be completed. Key areas will include determining when a country has the right to tax trading profits and the rules for allocation of trading profits to each country. A particular focus is on ensuring enough profit is awarded to the market jurisdiction, whether the country of users or sales.

Modified residual profit split (MRPS) method

The MRPS method is similar to the marketing intangibles proposal set forth in the February consultation draft and is widely understood to be the United States' counter to narrower proposals that were aimed solely at digital businesses. This MRPS approach would allocate to market jurisdictions a portion of a multinational group's non-routine profit that reflects the value created in those markets that is not recognised under the existing profit allocation rules.

The MRPS method involves four steps:

  1. Determining total profit to be split;

  2. Removing routine profit, using either TP rules or simplified conventions;

  3. Determining the portion of the non-routine profit that is within the scope of the new taxing right, using either transfer pricing rules or simplified conventions; and

  4. Allocating such in-scope non-routine profit to the relevant market jurisdictions, using an allocation key such as revenues.

The simplified approaches under this proposal would include consideration of possible proxies, such as capitalised expenditures, projections of future income, or fixed percentages of total non-routine income, to determine non-routine profit. Furthermore, the MRPS method would coexist with the existing TP rules for purposes of determining non-market-related returns. The Inclusive Framework recognises that rules for coordinating these two sets of rules would be necessary to provide certainty, minimise disputes, and ensure the avoidance of double taxation.

Fractional apportionment method

The fractional apportionment method would tax MNE groups without making any distinction between routine and non-routine profit. This method would involve three steps:

  1. Determining the profit to be divided;

  2. Selecting an allocation key; and

  3. Applying this formula to allocate a fraction of the profit to the market jurisdiction(s).

Under this method, one possible approach would be to take into account the overall profitability of the relevant group or business line.

In exploring this method, the Inclusive Framework will examine a number of issues, including how to determine the starting point for computing the relevant profits. Such options may include looking at the profit of the selling entity as determined by the TP rules or by applying a global profit margin to local sales. Under this approach, the Inclusive Framework will also examine the selection of an appropriate allocation key, which may include employees, assets, sales, or users.

Distribution-based approaches

In addition to the two methods described above, the Inclusive Framework will also explore other simplified methods. Such an approach might address, in addition to non-routine profit, profit arising from routine activities associated with marketing and distribution.

One possibility would be to specify a baseline profit in the market jurisdiction for marketing, distribution and user-related activities. Other options might also be considered, such as increasing the baseline profit based on the MNE group's overall profitability. Through this mechanism, some of the MNE group's non-routine profit would be reallocated to market jurisdictions.

In connection with distribution-based approaches, the programme of work states that further consideration would need to be given to issues such as whether this approach would result in a 'final allocation' – one that neither taxpayers nor tax authorities would be able to re-evaluate under TP rules – and whether the baseline profitability would function as a minimum or a maximum profit in the relevant jurisdiction.

New nexus rules

As part of this process, the Inclusive Framework will explore ways to revise the nexus rules to render the new profit allocation rules applicable in a far broader context than the nexus/PE rules, although precisely how broad is under discussion. Will countries attempt to use the nexus rules to restrict the scope of the new rules to more traditional digital models, and if they do, will they be able to reach consensus in light of the US position that the technology sector not be singled out? In any event, the new rules will likely involve having a remote taxable presence even without a traditional physical presence, and a new set of standards for determining when such a remote taxable presence exists.

Pillar 2: Income inclusion rule and tax on base-eroding payments

Under Pillar 2, the members of the Inclusive Framework have agreed to explore an approach that considers the right of other jurisdictions to apply rules in cases in which income is taxed at an effective rate below a minimum rate.

The programme of work makes no reference to what the minimum rate might be, but sets out that a single, agreed-upon rate would be preferable to either a rate set as a percentage of the rate in the MNE parent's residence country or a band of rates from which countries would be allowed to choose. As discussed below, the programme of work will explore an inclusion rule, a switch-overrule, an undertaxed payment rule, and a subject-to-tax rule. These rules are discussed under the global anti-base erosion (GLoBE) proposal and through taxes on base-eroding payments.

Global anti-base erosion proposal

This proposal seeks to address the remaining BEPS challenges through the development of two interrelated rules:

  • An income inclusion rule that would tax the income of a foreign branch or a controlled entity if that income was subject to tax in the recipient's jurisdiction at an effective rate below a minimum rate; and

  • A tax on certain base-eroding payments not subject to tax at or above a minimum rate in the recipient's jurisdiction, which would operate by way of a denial of a deduction or imposition of source-based taxation (including withholding tax), together with any necessary changes to double tax treaties.

These rules would be implemented by way of changes to domestic law and double tax treaties. They would also incorporate a coordination or ordering rule to avoid the risk of economic double taxation.

The income inclusion rule would operate as a minimum tax by requiring a shareholder in a corporation to bring into account a proportionate share of the income of that corporation if that income was not subject to an effective tax rate above a minimum rate. Income taxed below the minimum rate, but in connection with a harmful tax regime, would be taxed in the parent country at full rates. This rule could supplement a jurisdiction's controlled foreign corporation (CFC) rules. The Inclusive Framework would explore, among other options, an inclusion rule that would impose a minimum tax rate and an approach using a fixed percentage of the parent jurisdiction's corporate income tax (CIT) rate or a corridor of CIT rates. Various carve-outs might be provided, such as a return on tangible assets.

Tax on base-eroding payments

The second key element of the proposal is a tax on base-eroding payments that complements the income inclusion rule. This element of the proposal would explore:

  • An undertaxed payments rule, which would deny a deduction or impose source-based taxation (including withholding tax) for a payment to a related party if that payment was not subject to tax at a minimum rate; and

  • A subject-to-tax rule in tax treaties, which would grant certain treaty benefits only if the item of income was subject to tax at a minimum rate.

The subject-to-tax rule could complement the undertaxed payment rule by subjecting a payment to withholding or other taxes at their source and denying treaty benefits on certain items of income when the payment is not subject to tax at a minimum rate. This rule contemplates possible modifications to the scope or operations of various treaty benefits, with priority given to interest and royalties.

Will countries come to consensus on either or both pillars of work? It is too soon to tell.

Countries are involved in good faith discussions around finding an acceptable path, but the scope of the work is unprecedented and there are many political challenges both within countries and among countries. Nonetheless, participants have expressed a desire that a political consensus be reached by the end of 2019 on the broad outlines of an agreement, with technical work and implementation to follow. Because implementation would require changes to both domestic law and international treaties, it seems highly unlikely that implementation could occur before 2023 at the earliest. Companies should pay close attention as this important work moves forward.

Alison Lobb



Deloitte UK

T: +44 20 7007 0497


Alison Lobb is a partner in London who specialises in transfer pricing, tax policy and international tax. Her work includes leading on Deloitte TP input to OECD and UK government consultations on international tax matters, including the G20/OECD BEPS project.

Alison has multinational clients quoted on the London and New York stock exchanges across all business sectors. As well as TP analysis, documentation, audits and advance pricing agreements (APA), Alison covers all areas of international taxation and business models, such as questions of: residence; permanent establishment; withholding tax; diverted profits tax; EU Directives; and BEPS initiatives.

Bob Stack


Managing director

Deloitte Tax LLP

T: +1 202 220 2100


Bob Stack has more than 26 years of experience advising US companies and individuals on a full range of international tax issues. He collaborates with Deloitte's global member firms on international tax developments and initiatives, including those from the OECD.

Prior to joining Deloitte, he was the deputy assistant secretary for international tax affairs in the Office of Tax Policy at the US Department of the Treasury, where he worked directly with the assistant secretary of tax policy and the international tax counsel in developing and implementing all aspects of US international tax policy, including treaties, regulations and legislative proposals.

Bob was the official representative of the Obama administration for international tax policy and represented the US government at the OECD, where he was involved in all aspects of the BEPS initiative.

Copyright © 2019 Deloitte Development LLC. All rights reserved.

This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms or their related entities (collectively, the ‘Deloitte network’) is, by means of this communication, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte network shall be responsible for any loss whatsoever sustained by any person who relies on this communication.

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