OECD has decided to go ahead with a global digital tax

The OECD member states have agreed to move ahead with the plan to reach a global solution by 2020 to harmonise tax regimes on the digital companies.

Wei Shi

January 30, 2019

3 Min Read
OECD has decided to go ahead with a global digital tax

The OECD member states have agreed to move ahead with the plan to reach a global solution by 2020 to harmonise tax regimes on the digital companies.

The OECD and the G20 have a joint working mechanism, called Inclusive Framework, to address the tax issues related to digital economy, covered under an umbrella concept of Base Erosion and Profit Shifting (BEPS). After the most recent Inclusive Framework meeting held 23-24 January, a Policy Note was published to outline the agreed framework of the future solution.

“The international community has taken a significant step forward toward resolving the tax challenges arising from digitalisation. Countries have agreed to explore potential solutions that would update fundamental tax principles for a twenty-first century economy, when firms can be heavily involved in the economic life of different jurisdictions without any significant physical presence and where new and often intangible drivers of value become more and more important,” said Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration. “In addition, the features of the digitalised economy exacerbate risks, enabling structures that shift profits to entities that escape taxation or are taxed at only very low rates. We are now exploring this issue and possible solutions,” Saint-Amans added.

In essence, the solution will be based on consensus on two key areas, or “pillars”: “One pillar addresses the broader challenges of the digitalised economy and focuses on the allocation of taxing rights, and a second pillar addresses remaining BEPS issue,” as the Note put it.

The first pillar will focus on how to modify the current tax practices based on physical locations of the businesses, re-examining the so-called ‘nexus’ rules, that is 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.

The second pillar refers to the issues not yet addressed by the on-going BEPS project. In the past two years, a Forum on Harmful Tax Practices (FHTP), under the aegis of OECD/G20 BEPS Project, has reviewed and assess 255 tax regimes (there can be multiple tax regimes in one tax jurisdiction). The majority of them are either deemed not harmful, or amended to be not harmful, or abolished. These are submitted by signatories on the “Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting”. So far, 87 jurisdictions have signed on the Convention. 19 of them have completed their domestic ratification processes, where the Convention has already become effective, or are going to come into effect soon.

However, the Inclusive Framework recognises that BEPS would not be able to cover every loophole, and there would be “continued risk of profit shifting to entities subject to no or very low taxation through the development of two inter- related rules, i.e. an income inclusion rule and a tax on base eroding payments”. Therefore the second pillar will be on how to make the solution more future-proof.

More detailed proposals will be published in the coming weeks, and they will be submitted to the next G20 Summit meeting in June.

The OECD/G20 programme is part of a global move to hold the webscale companies accountable to their tax obligations. Earlier countries like France and Spain have taken the matter in their own hands, while the EU was working to reach a Union-wide consensus but the Council of Finance Ministers failed to approve it in December 2018. However, if the OECD consensus is accepted by 2021, the EU would withdraw its own tax anyway, according to the original plan.

Tax regulations can become draconian. For example, the US tax code has gone from 400 pages in 1913 to nearly 75,000 pages now. The Inclusive Framework is mindful of the danger, therefore demand the member jurisdictions “to make any rules as simple as the tax policy context permits, including through the exploration of simplification measures.”

About the Author

Wei Shi

Wei leads the Telecoms.com Intelligence function. His responsibilities include managing and producing premium content for Telecoms.com Intelligence, undertaking special projects, and supporting internal and external partners. Wei’s research and writing have followed the heartbeat of the telecoms industry. His recent long form publications cover topics ranging from 5G and beyond, edge computing, and digital transformation, to artificial intelligence, telco cloud, and 5G devices. Wei also regularly contributes to the Telecoms.com news site and other group titles when he puts on his technology journalist hat. Wei has two decades’ experience in the telecoms ecosystem in Asia and Europe, both on the corporate side and on the professional service side. His former employers include Nokia and Strategy Analytics. Wei is a graduate of The London School of Economics. He speaks English, French, and Chinese, and has a working knowledge of Finnish and German. He is based in Telecom.com’s London office.

Get the latest news straight to your inbox.
Register for the Telecoms.com newsletter here.

You May Also Like