OECD Tax Talk #11 – BEPS

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On 29 January 2019, the first webinar of the new year 2019 took place with Pascal Saint-Amans, Director of the Centre for Tax Policy and Administration, Achim Pross, Head of International Co-Operation and Tax Administration, Sophie Chatel, Head of Tax Treaty Unit, Sandra Knaepen,

Head of Mutual Agreement Procedure Unit, as well as Anne Moore and Tibor Hanappi of the Tax Policy and Statistics Division.


Pascal Saint-Amans started the webinar with the announcement that today (29 January 2019) the Inclusive Framework published a policy note to the tax challenges of the digitalisation of the economy as part of Action Point 1.

Tax Challenges of the Digital Economy (Action Point 1)

Pascal describes this policy note as a milestone: While the Final Report of October 2015 agreed that VAT should be levied in the destination country, there was no agreement among the countries regarding the corporate profit tax. Some countries felt that the tax regulations had to be revised in this respect, others were against it and so the Final Report was published without a clear result.

In the following interim report, which was published in March 2018, three groups of countries with different views emerged:

  • The first group of countries thought that they should wait for the report planned for 2020 and then evaluate whether there really is a need for changes in the taxation system. There might be no need for any changes at all.
  • The second group of countries was in favour of adapting the tax regulations to the new circumstances of highly digitised companies. A right of taxation should be introduced for the countries where the users of such highly digitised companies physically reside («user contribution concept»).
  • The third group of countries (including the USA) took the view that the problems surrounding digitisation do not only affect highly digitised companies. Changes in taxation should therefore be made for the broader economy and not only for the «digital sector».

Although no agreement was reached between these three groups of countries, they were nevertheless united in their belief that they would continue to work towards a long-term solution together.

Since the publication of the interim report in March 2018, the Task Force on Digital Economy (TFDE), which currently comprises 127 members, met again in July and December 2018. These meetings were very

fruitful, according to Pascal Saint-Amans. New ideas emerged which can be classified under two pillars.

 

1. The first pillar refers to the «Nexus Approach» and profit allocation. When do you tax a company in this new digitised world? Three different ideas can be subsumed under this first pillar:

 

a. «Active User Contribution»: The current regulations concerning the «Nexus Approach» and profit allocation in highly digitised companies should be revised to the effect that such a company is taxed where its active user base is located.

b. «Marketing Intangible Approach»: This approach goes even further by stating that value creation today is not only achieved by users, but also by the marketing intangibles. Therefore, there should be a taxing right of the market jurisdiction. This approach should apply to all types of companies, not just highly digitised ones.

c. «Significant economic presence»: Developing countries in particular insist that new regulations must not be too complicated, otherwise some countries will not be able to implement them. A solution that is easy to implement should be pursued.

 

2. The second pillar contains an idea, which was mainly put forward by Germany and France. These countries say that the problem of digitisation cannot be tackled in isolation from the other BEPS objectives, and that the first priority must be to continue to combat the shifting of profits. One proposal under this pillar is the introduction of a minimum tax, similar to the one that the US tax reform has introduced.

 

These four proposals have been integrated into the policy noe and the states agree that they need to be further explored and better understood in order to find a long-term, consensus-based solution as soon as possible. Furthermore, there is a consensus that methods that go beyond the «arm's length principle» should now also be considered. However, this should not lead to double taxation or taxation where there is no economic profit.

A public consultation on the new policy note will take place in February 2019, during which all stakeholders (companies, governments and civil society) will be able to submit written comments. Between 12 and 14 March 2019, a meeting will be organised in Paris as part of the public consultation. Based on the results of the consultation, the TFDE will submit a detailed programme of work detailing how to proceed until the end of 2020 and how to find a coherent solution. The programme of work will be submitted to the Inclusive Frame-work in May 2019 and to the G20 Finance Ministers in June 2019.

Harmful Tax Practices (Action Point 5)

Achim Pross announced the publication of a progress report on preferential regimes. The following slide shows the Progress that has been made in this area:

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In addition to the ongoing monitoring of preferential tax regimes, the next step would be to examine tax regimes that do not have any, or only very low, corporate taxation that does not reflect real value. The aim is to create a level playing field throughout the world.

Prevention of Treaty Abuse (Action Point 6)

A new report on Action Point 6 will be published in February 2019. Action Point 6 (Minimum Standard) wants the existing double taxation agreements (DTAs) to be amended so that they cannot be used to

avoid taxation and so that so-called «Treaty Shopping» is prevented. According to Sophie Chatel, the new report shows that the majority of DTAs (65%) are modified in this sense by the Multilateral Instrument (MLI) and not via the bilateral path. The report also contains situation reports on a total of 116 countries.

Multilateral Instrument (Action Point 15)

87 countries have so far signed the Multilateral Instrument (MLI), 19 of which have also ratified it. On 1st of January 2019, the MLI entered into force for the first 47 agreements.

Country-by-Country-Reporting (Action Point 13)

So far, 80 countries have introduced CbCR regulations, and efforts are constantly being made to improve CbCR. Achim Pross particularly thanked the companies, which would repeatedly point out discrepancies to his team. This is very important, he said. The tax authorities are now in the process of analysing the first country-specific reports and the OECD will soon publish a new handbook on effective tax risk assessment. In addition, a major report on Action Point 13 will be published in 2020.

Mutual Agreement Procedure (Action Point 14)

Sandra Knaepen provided information on Action Point 14 concerning dispute avoidance and resolution. The positive news is that in 20% of the cases a state can solve the dispute itself unilaterally and that 80% of the transfer pricing disputes could be solved completely. Of course, there would still be room for improvement. The following graphs of the top 10 states, including Switzerland, were particularly interesting:

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According to Sandra Knaepen, the «2018 MAP statistics» should be available by the end of May 2019 and published towards the end of 2019.

New Corporate Tax Statistics

Anne Moore and Tibor Hanappi presented the corporate tax statistics collected in response to Action Point 11. On 15 January 2019, the first edition of the corporate tax statistics was published. The core message of the statistics is that corporate tax is still one of the main sources of revenue for governments, especially in developing countries. The statutory corporate income tax rates vary from 0% to over 40%. In recent decades, however, corporate income tax rates have declined significantly on all continents. But the statutory corporate income tax rates are only one part of the story: Tibor Hanappi presented graphs showing how tax relief for research and development or the patent box affect the effective corporate income tax. In the next issue of the corporate tax statistics, which is to be published at the beginning of 2020, will also include the data from the CbCR.

Conclusion

A lot has happened in the months since the last OECD Tax Talk #10. Especially concerning the digitalisa-tion of the economy, a lot is happening at the Moment. On 15 January 2019, the State Secretariat for Inter-national Financial Matters (SIF) published an update regarding Switzerland's position on the taxation of

the digitised economy. Although there is still no consensus among the countries on what the future taxation of a digitised economy should look like, Pascal Saint-Amans and his team seem very confident that such a consensus can be reached by the end of 2020. We are eager to see what happens next!