OECD Fleshes Out Int'l Tax Reform Plans During BEPS Webcast
Ulrika Lomas, Tax-News.com, Brussels
13 June, 2019
During a webcast on June 11, the OECD provided a technical update on its work to develop new, modernized international tax rules for the digitalized economy.
Under a mandate from countries that have agreed to implement the BEPS minimum standards – the BEPS Inclusive Framework – the OECD is developing new digital tax rules that would be presented for adoption internationally at the end of 2020.
At its January 23-24, 2019, meeting, the BEPS Inclusive Framework agreed that the OECD's work should focus on two central pillars.
First, the OECD will review existing rules that divide up among jurisdictions the right to tax the income of multinational enterprises, including traditional transfer pricing rules and the arm's length principle. It will look at how these can 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.
It was explained during the webcast that this will involve looking holistically at the tax affairs and economic activities of a multinational group globally. It will involve tying tax liability more to activities in a market economy, while looking also at a group's marketing activities and digital engagement activities elsewhere, among other things, the OECD said.
The OECD webcast looked at the infrastructure that would need to underpin these new nexus rules, including information exchange advancements and what new reporting requirements might need to be introduced on MNE groups.
Under the second pillar, the Inclusive Framework will seek 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. This work looks to minimize tax base erosion and profit shifting by ensuring that income is not inappropriately shifted to territories that levy no or low tax rates, by ensuring that income is subject to at least a minimum level of tax, wherever that may be.
This would involve the introduction of a new effective tax rate test, which would also enable stakeholders to better determine in a harmonized way how much tax multinationals pay internationally.
The OECD discussed a potential carve-out for income from research and development activities subject to beneficial tax rates under regimes that are BEPS compliant.
The proposals will seek to avoid uncoordinated rules among territories and also aim to boost the ability of developing countries to levy tax on foreign investors. As income will be subject to at least a minimum level of taxation, a multinational receiving excessive tax breaks will have to pay tax elsewhere. This should relieve tax competition pressures on developing countries, supporting their efforts to expand their tax bases. It should also to nullify the appeal of offshore financial centers that do not currently operate a corporate income tax regime and end the "race to the bottom" on corporate tax rates, the OECD said.
The OECD said it needs to flesh out how a minimum tax would be introduced in practice, and how to avoid instances of double taxation, or even taxation in multiple jurisdictions.
Under the reforms, countries may be required to adopt changes to domestic law and treaty changes to allow for the imposition of source country tax where income is not subject to at least a minimum tax burden. This could be effected through changes to the BEPS multilateral instrument to amend tax treaties, the OECD suggested. The OECD will also look at the knock-on impact on tax rules for cross-border interest and royalties income.
The OECD will also look at the interaction of this new minimum tax proposal with the EU's four fundamental freedoms.
The OECD said it will be mindful of the impact on the global economy of its proposals. It will analyze the impact of its proposals specifically on innovation, investment, and growth, and the measures' impact on different industries and economies at different developmental stages.
Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration, acknowledged that the 2020 timeline is "extremely ambitious and may prove difficult." He said between now and then the OECD will work to build an international consensus.
Discussing the need for an international agreement, representatives from the OECD said that pillar two will require fewer if any significant tax treaty changes. As such, the OECD will look to discourage countries from implementing domestic law changes unilaterally and in particular new income inclusion rules to lay claim to income not subject to the minimum tax burden. International discussions will need to discuss how such residual income will be taxed, the OECD said.
The OECD said it intends to release an intermediate report in either October or November of 2019. It will prepare analyses through until the end of 2020, when it expects to release its finalized proposals for international tax reform.