Doing business in the United States: The OECD’s BEPS project

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A. OECD BEPS implementation and addressing the challenges of the digitalization of the economy

The uncertainties for US and non-US multinational corporations (MNCs) created by global tax issues and disputes likely will remain for some time. The impact of US tax reform continues to be closely monitored by other countries as they consider whether to introduce their own unilateral and multilateral reforms.

The OECD Inclusive Framework – which is committed to implementing the BEPS minimum standards – now has over 120 member countries and continues to expand. Under a mandate of the G20, the OECD seeks consensus among this large and diverse group of countries on the implementation and monitoring of the BEPS Project, and on the accelerated project reviewing the tax challenges of digitalization.

Meanwhile, the EU has taken a more active role in tax policy, implementing (and going beyond) the BEPS recommendations, reviewing and overruling domestic tax measures and rulings, and seeking agreement among its members and the international community regarding short-term and long-term measures to tax digital activities.

Digitalization of the economy

The taxation of the digitalization of the global economy continues to be a focus for policymakers and MNCs.

Background

Following the G20’s request in 2017 for the OECD to accelerate its post-BEPS review of the tax challenges of digitalization, 2018 saw significant developments in terms of the OECD’s progress in exploring a global solution that could be agreed to by the Inclusive Framework countries. At the same time, unilateral measures have been developed by individual countries and the EU in lieu of a global agreement. Proponents of regional and unilateral measures claim they are necessary to encourage international agreement and meet short-term revenue needs and perceptions of fairness in the tax system. However, some US officials publicly have expressed concern regarding these measures, arguing that they create transatlantic trade barriers by discriminating against US businesses.

OECD efforts

Building on the 2015 BEPS Action 1 Report, the OECD in March 2018 released an Interim Report that includes an in-depth analysis of the changes to business models and value creation arising from digitalization. The Interim Report states that the following characteristics are frequently observed in certain highly digitalized business models:

  • cross-jurisdictional scale without mass
  • reliance on intangible assets
  • the importance of data, user participation, and their synergies with intellectual property.

Describing the potential implications for international tax rules, the Interim Report identifies the positions that different countries hold, which drive their approach to possible solutions. Some countries take the position that no action is needed, others consider there is a need for action that would take into account user contributions (i.e., in ‘digital’ business models), and still others consider that any changes should apply to the economy more broadly. The Interim Report paved the way for the OECD to move forward toward a long-term multilateral solution in the next phase of work.

In early 2019 the OECD announced that the Inclusive Framework will step up efforts toward reaching a global solution to the growing debate over how to best tax multinational enterprises in a rapidly digitalizing economy. Its work will focus on two central pillars identified in a new Policy Note released after the Inclusive Framework’s January 23-24 meeting, which brought together 264 delegates from 95 member jurisdictions and 12 observer organizations.

The first pillar will focus on how the existing rules that divide up the right to tax the income of multinational enterprises among jurisdictions, including traditional transfer-pricing rules and the arm’s-length principle, could be modified to take into account the changes that digitalization has brought to the world economy. This will require a re-examination of the so-called ‘nexus’ rules – namely 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 Inclusive Framework will look at proposals based on the concepts of marketing intangibles, user contribution, and significant economic presence, and how they can be used to modernize the international tax system to address the tax challenges of digitalization. A second pillar aims to resolve remaining BEPS issues and will explore two sets of interlocking rules designed to give jurisdictions a remedy in cases where income is subject to no or only very low taxation. Members of the Inclusive Framework renewed their commitment to reaching a consensus-based, long-term solution in 2020, with an update to be presented to the G20 during 2019.

The OECD on February 13 released a released a public consultation document on Addressing the Tax Challenges of the Digitalisation of the Economy, specifically regarding the two 'pillars' described above. These 'pillars' are not referred to as such in the consultation document, but are included in Chapters 2 and 3.

Contact us

Christopher Kong

Leader, US Inbound Tax

Tel: +1 (416) 402 3132

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