On January 29, 2019, several senior OECD officials held their eleventh “Tax Talks” webcast, which focused digitalization and BEPS implementation developments, as covered below. A replay of the webcast can be found here.
Tax and Digitalization
The Director of the OECD Centre for Tax Policy and Administration, Pascal Saint-Amans, walked through the Policy Note approved by members of the BEPS Inclusive Framework following their January 23rd meeting in Paris on addressing the tax challenges of the digitalization of the economy. He said that most of the language in Policy Note is fundamentally new.
Lack of multilateral agreement on the BEPS Action 1 final report in 2015 led to unilateral country measures, with the German G20 Presidency asking the OECD for an interim report in March 2017. As a result, in March 2018, the OECD released an interim report, which discusses the following key features of the digitalized economy: (1) cross-jurisdictional scale without mass; (2) heavy reliance on intangible assets; and (3) the importance of data and user participation. Three groups of jurisdictions emerged in the multilateral negotiations leading up to the 2018 interim report, with some saying no major changes are needed due to increasing BEPS project implementation, and others advocating for changes to address broader challenges caused by digitalization of the economy. However, all countries agreed to work towards a consensus-based, long-term solution.
Thereafter, the OECD Task Force on the Digital Economy (TFDE) met in July and December 2018 to discuss possible digital tax solutions. Mr. Saint-Amans said that these meetings focused on two pillars: (1) nexus and profit allocation; and (2) remaining BEPS issues, with the latter advanced by Germany and France. Four proposals were made by the TFDE on the foregoing pillars:
- Pillar one on user contribution would revise existing rules on profit allocation and nexus by reference to “active user contribution,” and would apply to highly digitalized businesses.
- Pillar one on marketing intangibles would revise existing rules on profit allocation and nexus by reference to “marketing intangibles,” which would apply broadly to all types of businesses, and would recognize the value created by the market jurisdiction.
- Pillar one on significant economic presence would be grounded in the BEPS Action 1 final report, with nexus rules that are simplified and easy to administer. Colombia and other developing countries are favoring this approach, pioneered by India, according to Mr. Saint-Amans.
- Pillar two would address ongoing profit shifting that arises due to significant disparities in corporate income tax rates, which would provide resident and source countries a right to “tax back” profits subject to no or low tax. Proposed rules would include an income inclusion rule that would include such profits as income in the hands of related party investor, similar to the U.S. GILTI rules, and a tax on base eroding payments that would allow the source country to deny a deduction (or impose a withholding tax) on under-taxed payments, similar to the U.S. BEAT.
Mr. Saint-Amans said that the Policy Note shows multilateral agreement to examine the foregoing proposals involving the two digital tax pillars, which could form basis for consensus. Notably, the proposals go beyond the arm’s-length principle, especially for residual profits that may result in creation of new transfer pricing methods. Achim Pross said that the marketing intangible and user participating approaches would use some sort of profit split allocation, which the Inclusive Framework members are still working on. Also, the OECD is working on a possible global minimum tax, such as the U.S. GILTI, according to Mr. Pross.
Mr. Saint-Amans said the proposals should not result in taxation when there is no economic profit, and should not result in double taxation. The Policy Note also stresses the importance of tax certainty and effective dispute prevention and dispute resolution tools.
The Policy Note mandates a detailed program of work in the coming months, which the Inclusive Framework could agree to at its May 2019 meeting, with a view to report its progress at the G20 Finance Ministers meeting in June 2019. Mr. Saint-Amans said the OECD will release a public consultation document in February 2019, as this issue affects many stakeholders (e.g., tax authorities and taxpayers). The TFDE will then hold a public consultation meeting in Paris in March 2019 to discuss the public comments.
Accordingly, the remaining work would be finalized over the next 18 months, in order for the OECD to deliver a solution to the G20 in 2020.
BEPS Project Implementation
Mr. Pross then discussed the 2018 Progress Report released by OECD earlier in the day on preferential tax regimes, pursuant to BEPS Action 5. Since the start of the BEPS project, the Forum on Harmful Tax Practices (FHTP) has reviewed 255 tax incentive regimes from 70 jurisdictions. The 2018 Progress Report covers 80 FHTP decisions on 57 tax regimes from 19 jurisdictions, with only two regimes found to still be harmful. Mr. Pross said the remaining harmful regimes will be resolved with time due to use of grandfathering provisions. Covered tax incentive regimes must have substance, to have a global level playing field. All intellectual property (IP) incentive regimes are now compliant with the BEPS Action 5 recommendations, with over 100 pieces of legislation enacted by countries over time to make them compliant, according to Mr. Pross.
Upcoming FHTP work in 2019 includes review of no (or only nominal) tax jurisdictions, and ongoing preferential regime reviews. Mr. Pross also mentioned the ongoing country peer reviews on the tax transparency framework, which includes exchange of advance tax rulings under BEPS Action 5.
Regarding BEPS Action 6 country peer reviews, Sophie Chatel said that OECD will release an updated peer review document in February 2019, which will cover the following Action 6 minimum standards: (1) treaty preambles; and (2) anti-treaty shopping provisions. Aggregate results in the foregoing updated document will cover 116 jurisdictions, and will show that 65% of treaties will be modified by the OECD’s Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“BEPS MLI”) to comply with the Action 6 minimum standards.
Regarding BEPS Action 15, Ms. Chatel said that 87 jurisdictions are now covered by the BEPS MLI, with over 1,500 matched agreements, and over 1,000 waiting for a match. 28 jurisdictions have opted for arbitration. 19 jurisdictions have now deposited their BEPS MLI ratification instrument with the OECD, including Ireland on January 29th. The BEPS MLI entered into effect for 47 agreements on January 1, 2019.
Regarding BEPS Action 13, Mr. Pross said that about 80 jurisdictions now have country-by-country (CbC) reporting requirements in place, which generally align with the OECD minimum standard. Over 7,000 CbC reports were filed for 2016, in line with OECD expectations. Exchanges of CbC reports are now operating as intended via the OECD Common Transmission System (CTS), according to Mr. Pross. Over 2,000 bilateral exchange agreement relationships are active, including between 75 signatories to the OECD Multilateral Competent Authority Agreement for the automatic exchange of country-by-country reports (“CbC MCAA”). Tax authorities are now using CbC reports for risk assessments, including based on the September 2017 OECD Handbook on effective tax risk assessment, and CbC report risk assessment workshops held in various regions.
Mr. Pross said that the 2020 OECD review of CbC reporting requirements will identify issues for public consultation, based on those raised over the last three years by various stakeholders (e.g., tax authorities), such as scope, content, local filing, and standardization of master files. Public consultation will be held in late 2019/early 2020.
Regarding BEPS Action 14 developments, Sandra Knaepen said that the 2017 OECD mutual agreement procedure (MAP) statistics show that more MAP cases are now being closed by tax authorities. However, there has been a 40% increase in new MAP cases, and bilateral renegotiations of income tax treaties not modified by the BEPS MLI will be needed. 2018 MAP statistics will be submitted by May 2019.
Corporate Tax Statistics Database
Anne Moore and Tibor Hanappi briefly discussed the first edition of the Corporate Tax Statistics database launched by OECD on January 15, 2019, based on the recommendations in the BEPS Action 11 final report. Ms. Moore said that declining headline statutory corporate income tax rates only tell part of the story, due to special tax rates, effective tax rates, and innovation-related incentives. Mr. Hanappi said that R&D tax incentives have become increasingly relevant, with Russia, France, Belgium, and Ireland providing the most innovation incentives in recent years. Aggregated CbC report information will be included in the OECD database starting with the second edition, to be released in early 2020, according to Mr. Hanappi. Mr. Saint-Amans said that the OECD hopes to issue more guidance on the CbC report data around the time of the June 2019 G20 Finance Ministers meeting.
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