Digital taxation is not a new subject. The OECD reported on this back in the original Base Erosion and Profit Shifting project back in 2015 and since then there has been much talk reaching a global consensus in 2020. Given where we are it would be easy to think this was an impossible task.
However, their latest report on the subject sets out their approach and a timetable to meet this timeframe and deliver a solution by 2020.
The report outlines the proposed methodology to reach this solution which is made up of two pillars.
- Pillar one focuses on the allocation of taxing rights.
- Firstly, profit allocation – setting out new taxing rights to quantify the amount of profit allocated to market jurisdiction and how those profits will be calculated.
- Secondly, the nexus rules – essentially either rewriting the permanent establishment rules or developing new ones for today’s digital economy where there may be no actual physical presence
- Pillar two focus on the remaining BEPS issues and ways of achieving a ‘minimum tax’ to protect again profit shifting.
Not only does the technical theory need to be assessed, but work is also needed on how these new rules will be implemented and whether they can be realistically administered.
There are no easy answers to all this and the longer it takes to reach a global agreement the more likely countries are to implement their own solutions. Which risks significantly increasing compliance burdens, double taxation and uncertainty. Not to mention making it even harder to reach such an agreement.
Indeed, the UK has already announced measures which will come into force if the 2020 deadline isn’t met, albeit with a de minimis of £500m global revenues from in scope activities these are specifically targeted at the tech giants.
The report concedes that they have set themselves an extremely ambitious timetable and I agree. Not only is there a significant amount of work to do, but in a world where there seems to be more and more division, we shouldn’t underestimate the challenge they have in trying to reach a global consensus.