Countries that have or plan to enact a digital services tax agreed to continue to hold off another year while the international tax community works to iron out wrinkles of a global framework, the Organization for Economic Co-operation and Development (OECD) announced while providing an update on how talks have progressed.
At the 15th meeting of the of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting on July 11, 138 member nations signed off on a document called an Outcome Statement to highlight “significant progress” made towards a two-pillar approach to global tax reform designed to streamline tax treatment in the digital world, according to an OECD press release issued the following day.
As described in the Outcome Statement, Pillar One is comprised of two components referred to as Amount A and Amount B. Amount A allocates taxing authority to market jurisdictions where certain multinational enterprises make profit but do not have a physical location. Additionally, Amount A is intended to curb countries’ appetites for digital services taxes, eliminate double taxation and compliance hurdles, and promote stability.
“Amount B of Pillar One provides a framework for the simplified and streamlined application of the arm’s length principle to in-country baseline marketing and distribution activities with a particular focus on the needs of low-capacity countries which are most often related to the unavailability of appropriate local market comparables through which arm’s length prices can be established,” read the Outcome Statement.
Over 30 OECD governments that either already established a digital services tax or had plans to implement one previously pledged to not put them in effect until Pillar One was set in stone. That delay was originally in place through the end of 2023. First reported by Reuters last week, the OECD announced that the vast majority of its members agreed to extend this delay through 2024, allowing more time for technical work and deliberation.
Notably, Canada will nonetheless move forward with its digital services tax.
“This commitment is made in recognition of the progress made to date and the need to prevent disruption or delay of the ratification of the [Multilateral Convention (MLC)],” the press release said. The MLC serves as the official text for Amount A and was included in a package of updates on the two pillars delivered by the OECD in a July 17 report to G20 Finance Ministers and Central Bank Governors when leaders met in India.
Per the MLC, the scope of the taxing right under Amount A “covers MNEs with revenues above EUR 20 billion and profitability above 10%, and applies to 25% of the profit in excess of 10% of revenues. The revenue threshold will be lowered to EUR 10 billion after 7 years, conditional on the successful implementation of Amount A.”
The MLC also goes into further detail on:
- Revenue sourcing rules
- Mechanisms for relieving double taxation
- Ensuring tax certainty
- Compliance measures
- When it could go into effect
The OECD explained a date will be picked “after at least 30 jurisdictions accounting for at least 60 percent of the ultimate parent entities (UPEs) of in-scope MNEs have ratified it.” Regarding Amount B, the OECD says it has made headway on a framework now open to public consultation with the goal of finalization by the end of this year.
“We have all been working intensively on the technical details and on the implementation arrangements that are necessary to make the Two-Pillar Solution a reality,” OECD Secretary-General Mathias Cormann said last week when the Outcome Statement was made available. “The agreement reached yesterday proves that despite the challenges and compromises along the way, multilateral dialogue works and can deliver results to tackle shared challenges requiring shared solutions.”
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