OECD - Progress On Addressing The Tax Challenges Arising From Digitalization Of The Economy And Harmful Tax Practices

; posted on
January 31st, 2019

The OECD has issued a release announcing that the international community has made important progress towards addressing the tax challenges arising from the digitalization of the economy and has agreed to continue working multilaterally towards achievement of a new consensus-based long-term solution in 2020. In addition, the OECD has also issued a release on progress made in addressing harmful tax practices.

Two Pillars on Digital Economy

The policy note released on digital economy consists of four proposals that the Framework countries agree should be explored in depth. The four proposals are categorized into two “pillars.”

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 digitalization has brought to the world economy. This will require a re-examination 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.

Related to the profit allocation, OECD mentioned that some of the proposals in the first pillar would require reconsidering the current transfer pricing rules as they relate to non-routine returns, and other proposals would entail modifications potentially going beyond non-routine returns. In all cases, these proposals would lead to solutions that go beyond the arm’s length principle.

The 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. This pillar initiated by Germany and France pattern after the new US GILTI (global intangible low-taxed income) rules which would provide residence and source countries with the right to tax profits that are subject to low taxation.

The OECD will release a public consultation document on these two pillars and four proposals on February 11 or 12 soliciting written comments from stakeholders.

Progress on Harmful Tax Practices

In addition to the announcement of digital economy progress, the OECD also announced the recent development of preferential regime laid out in BEPS action 5. According to OECD, the latest assessment by the Forum on Harmful Tax Practices (FHTP) has yielded new conclusions on 57 regimes, includes:

  • 44 regimes where jurisdictions have delivered on their commitment to make legislative, changes to abolish or amend the regime.
  • Three new or replacement regimes were found "not harmful" as they have been specifically designed to meet Action 5 standard (Barbados, Curaçao and Panama).
  • Four other regimes have been found to be out of scope or not operational (Malaysia, Seychelles and two regimes of Thailand), and two further commitments were given to make legislative changes to abolish or amend a regime (Malaysia and Trinidad & Tobago).
  • One regime has been found potentially harmful but not actually harmful (Montserrat). Three regimes have been found potentially harmful (all in Thailand).

The forum will now start reviewing “no- or nominal tax” jurisdictions, which is an extension of the substance requirement from regimes to countries that lack a corporate income tax.

Sources: OECD (Tax Challenge of Digitalization), OECD (Harmful Tax Practice)


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