Countries agree on proposals to fix digital economy taxation

OECD seeking input on digital economy taxation

While members of the Inclusive Framework on BEPS did not yet agree on the conclusions, they committed to work together to deliver a final report in 2020, with an update in 2019

Georgia ratifies BEPS MLI

Members of the Inclusive Framework on Base Erosion and Profit Shifting (BEPS) today adopted a work plan setting out a process for reaching a new global agreement on addressing tax challenges posed by the digital economy.

The work plan explores the technical issues relating to digital economy taxation to be resolved through the two main pillars.

Pillar 1

The first pillar will explore potential solutions for determining where tax should be paid and on what basis (nexus), as well as what portion of profits could or should be taxed in the jurisdictions where clients or users are located (profit allocation).

Three proposals have been articulated in particular: the user participation proposal, the marketing intangibles proposal, and the significant economic presence proposal.

These proposals allocate more taxing rights to the market jurisdictions in situations where value is created by a business activity through (possibly remote) participation in that jurisdiction that is not recognized in the current framework for allocating profits, the report notes.

Further, these proposals contemplate the existence of a nexus in the absence of physical presence, contemplate using the total profit of a business, contemplate the use of simplifying conventions (including those that diverge from the arm’s length principle) to reduce compliance costs and disputes, and would operate alongside the current profit allocation rules, the report adds.

Pillar 2

The second pillar pertains to the design of a system to ensure that MNEs pay a minimum level of tax. This pillar would provide countries with a new tool to protect their tax base from profit shifting to low or no-tax jurisdictions, and is intended to address remaining issues identified by the BEPS project.

The report confirms that members of the Inclusive Framework on BEPS agree that any rules developed under this Pillar should not result in taxation where there is no economic profit, nor should they result in double taxation.

While members of the Inclusive Framework on BEPS did not yet agree on the conclusions to be drawn, they committed to continue working together to deliver a final report in 2020 aimed at providing a consensus-based long-term solution, with an update in 2019, the report notes.

The work plan was approved during the May 28-29 plenary meeting of the Inclusive Framework on BEPS, which brought together 289 delegates from 99 member countries and jurisdictions and 10 observer organizations.

OECD Secretary General Angel Gurría said: “Important progress has been made through the adoption of this new ‘Programme of Work,’ but there is still a tremendous amount of work to do as we seek to reach, by the end of 2020, a unified long-term solution to the tax challenges posed by digitalization of the economy.”

“Today’s broad agreement on the technical roadmap must be followed by a strong political support toward a solution that maintains, reinforces, and improves the international tax system. The health of all our economies depends on it.”


The author is Alex Hunter, Editor, TP News. He oversees and updates the publication and also  regularly writes news stories about transfer pricing and international tax law. Alex is reachable at editor@transferpricingnews.com