New OECD proposal aims to shore up tax revenues in digital era

By on 14/10/2019 | Updated on 24/09/2020
The proposal is based on the work of the OECD/G20 Inclusive Framework on BEPS, under which 134 countries are collaborating to put an end to tax avoidance strategies. (Image courtesy: The White House/flickr).

The OECD has published a proposal that aims to advance international negotiations to ensure large and highly profitable multinational enterprises (MNEs), including digital companies, pay tax wherever they have significant consumer-facing activities and generate profits.

The new proposal brings together common elements of three competing proposals from member countries, and seeks to reallocate some profits and corresponding taxing rights to countries and jurisdictions where MNEs have their markets. The proposal is based on the work of the OECD/G20 Inclusive Framework on BEPS – or Base Erosion and Profit Shifting – under which 134 countries are collaborating to put an end to tax avoidance strategies that exploit gaps and mismatches in tax rules.

The Programme of Work – which was adopted by the Inclusive Framework on BEPS at its meeting in May, and has been approved by the G20 – provides for the development of two pillars: Pillar One, the subject of this latest proposal, and Pillar Two, which aims to ensure that a minimum level of tax would be paid.

Under Pillar One, the proposal – currently under consultation – aims to ensure that MNEs conducting significant business in places where they do not have a physical presence become liable for tax, under new rules stating where tax should be paid and on what portion of profits they should be taxed.

Paying their fair share

“We’re making real progress to address the tax challenges arising from digitalisation of the economy, and to continue advancing toward a consensus-based solution to overhaul the rules-based international tax system by 2020,” said OECD secretary general Angel Gurría. “This plan brings together common elements of existing competing proposals, involving over 130 countries, with input from governments, business, civil society, academia and the general public. It brings us closer to our ultimate goal: ensuring all MNEs pay their fair share.”

“Failure to reach agreement by 2020 would greatly increase the risk that countries will act unilaterally, with negative consequences on an already fragile global economy,” he added. “We must not allow that to happen.”

The Inclusive Framework’s tax work on the digitalisation of the economy is part of wider efforts to restore stability and certainty in the international tax system, address possible overlaps with existing rules, and mitigate the risks of double taxation.

The ongoing work will be presented in a new OECD Secretary-General Tax Report during the next meeting of G20 finance ministers and Central Bank governors in Washington DC, on 17-18 October. Pillar Two will be discussed in a public consultation expected to take place in December 2019. The deadline for a consensus-based approach is 2020.

Taxation firmly rooted in the physical world

The OECD/G20 initiative aims to plug emerging gaps in countries’ tax systems, which are struggling to cope with the growth of digital businesses and the rise of complex, global corporate tax structures.

In December last year, Sol Picciotto, emeritus professor at Lancaster University Law School and a senior adviser to the Tax Justice Network, told Global Government Forum that the line between what is legal and illegal is “often very grey”, and that this is particularly true of the ways in which big businesses handle their tax affairs, taking advantage of the gaps and uncertainties within a complex, outdated global tax settlement.

“In this area we have got enormous grey areas, so they push the limits of legality,” says Picciotto. “They organise themselves in a way that minimises the tax they think they have to declare, and it is then up to the revenue authorities to try and challenge that.”

If the issue is not addressed by governments and revenue authorities, there are likely to be serious consequences. Last year, Canadian think tank The Mowat Centre – which has since closed due to funding cuts – published a report pointing out that most taxation is currently built around citizens’ residency and organisations’ physical locations, while disruptive technologies such as social media the sharing economy, and the rise of global digital platforms are leading to “an increasingly borderless world”, placing significant strain on the present tax system.

It said changes to the world of work, including automation, artificial intelligence and the rise of the gig economy, could erode tax revenues so severely that it becomes difficult to provide essential state services by 2040.

The issue of tax in the digital age was also discussed at the 2018 Global Government Finance Summit, at which Torsten Arnswald, head of the fiscal policy division in Germany’s Federal Ministry of Finance, called for cooperation. “In principle the common interest in the international community finding a proper [tax] framework should be clear,” he said. “This is a real case, I think, for international cooperation.”

About Mia Hunt

Mia is a journalist and editor with a background in covering commercial property, having been market reports and supplements editor at trade title Property Week and deputy editor of Shopping Centre magazine, now known as Retail Destination. She has also undertaken freelance work for several publications including the preview magazine of international trade show, MAPIC, and TES Global (formerly the Times Educational Supplement) and has produced a white paper on energy efficiency in business for E.ON. Between 2014 and 2016, she was a member of the Revo Customer Experience Committee and an ACE Awards judge. Mia graduated from Kingston University with a first-class degree in journalism and was part of the team that produced The River newspaper, which won Publication of the Year at the Guardian Student Media Awards in 2010.

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