OECD to consider worldwide fractional apportionment

International Tax Review is part of Legal Benchmarking Limited, 4 Bouverie Street, London, EC4Y 8AX

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

OECD to consider worldwide fractional apportionment

OECD to consider worldwide fractional apportionment

The OECD’s Inclusive Framework countries have agreed to a 40-page report that outlines potential ways to tax the digital economy. The document suggests, among other measures, introducing worldwide fractional apportionment for corporate profits.

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 endorsement.

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 participation’, ‘marketing 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’ rules.

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.

2.     Fractional 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.

3.     Distribution-based 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 jurisdictions.

Nexus: no indication of what will replace physical presence

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, proposal.

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 is payable.

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 corporate taxes”.

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 is considering.

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 countries.

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 daunting task.



more across site & shared bottom lb ros

More from across our site

Effective audit management requires more than documentation; it’s the way taxpayers engage that can shape audit direction, manage procedural ambiguity, and preserve options for appeal or litigation
American advisers are falling short of client expectations when it comes to providing value-added services, but remaining tight-lipped won’t make the problem go away
Awards
The Social Impact Awards unveil new categories to reflect a changing legal and social landscape
Australia's approach to tax policy has undergone significant shifts in recent years, reflecting global trends and unique domestic considerations. These developments merit close attention from tax professionals
The UK has temporarily dodged the 50% rate due to a trade deal signed with the US in May; in other news, Ryan acquired a Northern Irish tax firm
Following a $28 million funding round, Aibidia wants to ‘double down’ on the US market via partnerships with the ‘big four’, the Finnish TP tech provider’s CEO tells ITR
The Luxembourg-based TP leader tells ITR about relishing the intellectual challenge of his practice, his admiration for Stephen Hawking, and what makes tax cool
The case to determine whether the tariff regime is constitutional will eventually find its way to the US Supreme Court, ITR has also heard
In other news, the Council of the EU pledged support to a CBAM simplification and exemption initiative, and Portugal issued new VAT filing guidance
While Brazil’s sweeping tax updates are a triumph for modernisation, Giuliano Gioia of Sovos warns that MNEs with a Brazilian footprint should be prepared for a short and sharp adjustment
Gift this article