The EU Advisory Body has proposed a method to allocate residual profits from marketing intangibles with a four-factor formula as a way to adapt global tax rules for the digital age. The European Economic and Social Committee (EESC) adopted an opinion about taxation of the digital economy, noting that any changes on the allocation of taxing rights among countries should be coordinated globally, in order to harness the benefits of globalization.
In relation to Base Erosion and Profit Shifting (BEPS), countries within the OECD inclusive framework are considering a range of options under two pillars — one on the allocation of taxing rights and nexus issues, and the second on global minimum taxation. The first pillar includes a range of profit allocation approaches, including a modified residual profit-split method and a fractional apportionment method, as well as distribution-based approaches.
In addition to the two pillars, the EESC noted that the three-factor allocation key — capital, sales, and labor — used in the EU’s plan for a common consolidated corporate tax base could be used in a residual profit allocation method if the OECD solution includes one.
In order to determine the allocation keys, it is necessary to strike a reasonable balance between the reallocation of corporate profit taxes among net-exporting countries and net-importing countries, not to jeopardize the possibility of countries to meet their social and environmental objectives. In this regard, the countries where R&D activities take place should be remunerated in appropriate manner before allocating the big portion of profit to the market countries.
Despite of its idea on four factor formula, the EESC supports ongoing cooperation between the European Commission, EU member states, the G-20, and the OECD to reach agreement on a common approach by the end of 2020 to adapt the tax rules for the Digital Age. However, if an international solution cannot be reached, the EU may consider whether it should proceed on its own.
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