Earlier this week, the OECD announced the international community renewed its commitment “toward addressing the tax challenges arising from digitalisation of the economy and has agreed to continue working multilaterally towards achievement of a new consensus-based long-term solution in 2020.”
Following a meeting on January 23-24 on the Inclusive Framework and which involved 264 delegates of 95 member jurisdictions, the OECD agreed to ramp up their work on finding the ideal way to tax multinational companies in this era of digitalisation.
The discussions revolved around two central tenets of the OECD’s efforts to tackle the challenges posed by the digitilisation of the economy.
First, OECD members agreed to “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 digitalisation has brought to the world economy.”
According to the OECD, an in-depth look at this first pillar “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.”
Second, the OECD will look “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.”
The OECD’s Head of Taxation, Pascal Saint-Amans, said, “The international community has taken a significant step forward toward resolving the tax challenges arising from digitalization. Countries have agreed to explore potential solutions that would update fundamental tax principles for a twenty-first century economy, when firms can be heavily involved in the economic life of different jurisdictions without any significant physical presence and where new and often intangible drivers of value become more and more important.”
“In addition, the features of the digitalised economy exacerbate risks, enabling structures that shift profits to entities that escape taxation or are taxed at only very low rates. We are now exploring this issue and possible solutions,” Saint-Amans added.
A public consultation on these two pillars and the steps ahead will be held in mid-March in Paris during a meeting of the OECD’s Task Force on the Digital Economy.
OECD Also Announces Progress to BEPS Action 5 on Harmful Practices
At the same time, the OECD released the report, Harmful Tax Practices - 2018 Progress Report on Preferential Regimes, which shows what jurisdictions throughout the globe have accomplished in terms of tackling harmful tax practices, “including ensuring that preferential regimes align taxation with substance.”
Below is a table courtesy of the OECD summarizing the 255 tax regimes that have been looked at by the organization since the project’s inception.
Overall, the latest report reached conclusions on 57 particular tax regimes. Some of these highlights include:
- 44 tax regimes espoused by Antigua and Barbuda, Barbados, Belize, Botswana, Costa Rica, Curaçao, France, Jordan, Macau, Malaysia, Panama, Saint Lucia, Saint Vincent and the Grenadines, the Seychelles, Spain, Thailand and Uruguay have been amended or abolished to comply with OECD regulations.
- Those Intellectual Property (IP) regimes originally listed in the 2015 BEPS Action 5 report by Spain and France have been deemed no longer harmful.
- New or replacement tax regimes pitched by Barbados, Curacao and Panama met Action 5 standards and are not considered to be harmful.
- Three tax regimes offered by Thailand have been listed as being potentially harmful.
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