Progress on the OECD’s base erosion and profit shifting (BEPS) initiative has been slowed by the pandemic, as well as by the failure of the OECD/G20’s ‘inclusive framework‘ to reach consensus so far on aspects of the reforms.
However, BEPS Action 1 is supposed to be concluded in the middle of this year following discussion of the detailed blueprints for its two pillars this month (see panels below).
The Pillar 1 blueprint report, published in October 2020, noted that public pressure on governments to ensure that large multinationals ‘pay their fair share and do so in the right place’ has increased because of Covid-19.
Governments have responded to the pandemic through increased spending on healthcare and ‘unprecedented levels of financial support’ to businesses and workers, but the report says, ‘the time will come when governments will need to focus on putting their finances back on a fair and sustainable footing’.
It points out that political decisions are required in relation to the scope of Pillar 1 and, in particular, whether it should include consumer-facing businesses as well as automated digital services. Decisions are also needed on how much residual profit should be reallocated under the new taxing right, and the scope and application of Amount B (see panel below).
The two pillars
Pillar 1 provides for a reallocation of taxing rights. It expands the taxing rights of a market jurisdiction where there is ‘an active and sustained participation’ in the jurisdiction’s economy through activities ‘in, or remotely aimed at,’ the jurisdiction. A global revenue threshold, which could be set at €750m, is intended to exclude all but the largest multinationals.
Pillar 1 has three elements:
- a new taxing right over a share of residual profit (broadly, income exceeding an agreed level of profitability), calculated at group or segment level – this share is ‘Amount A’
- a fixed or standardised return for marketing and distribution activities in a market jurisdiction, which is intended to simplify transfer pricing administration and reduce taxpayers’ compliance costs – this return is ‘Amount B’
- dispute prevention and resolution mechanisms to improve tax certainty.
Pillar 2 addresses remaining tax challenges and is intended to ensure a minimum level of taxation through a global anti-base erosion (GloBE) mechanism. A key feature is an income inclusion rule (IIR) based on the principles behind controlled foreign company rules. An undertaxed payments rule acts as a backstop to the IIR. A subject-to-tax rule complements these rules and targets risks to source countries posed by intra-group payments that take advantage of low tax rates.
‘Because of Covid-19, suddenly we’re not just in a different place to what anyone might have predicted 12 months ago – we’re looking at different destinations too’
BEPS Action 1
The OECD noted in 2013 that the spread of the digital economy – characterised by reliance on intangible assets and the massive use of personal data – raises fundamental questions as to how businesses add value and make their profits.
BEPS Action 1, the first of 15 actions, aims to address the tax challenges of the digital economy, including a company’s ability to have a significant digital presence in the economy of another country, without being liable to tax, due to ‘the lack of nexus under current international rules’.
Significant differences
Over 250 respondents submitted public comments on the proposals. Will Morris, chair of the Business at OECD (BIAC) Committee on Taxation and Fiscal Affairs, noted that the Action 1 project is ‘of such vast scope, and with such differing impacts across sectors, that businesses have had difficulties coming to a single view’. He also pointed to significant differences between governments.
The committee suggests that, with time running out to reach agreement before countries begin to move unilaterally, consideration should be given to reaching ‘a more limited agreement by June 2021, coupled with a binding undertaking to engage in a more fundamental medium- to long-term discussion’.
RSM UK suggests that the inclusive framework should follow a principles-based approach; make the best use of existing requirements and processes; and consider carefully the resources available to both taxpayers and tax administrations when setting thresholds.
Jason Piper, ACCA policy lead for tax and business law, says that BEPS – and Action 1 in particular – was always going to be a challenging, multi-year project. He stresses the importance of keeping track of the bigger picture.
‘Because of Covid-19, suddenly we’re not just in a different place to what anyone might have predicted 12 months ago – we’re looking at different destinations too,’ he says.
‘The OECD team did an incredible job to pull together their economic impact assessment, but the economic environment it was based on no longer exists. There is a risk that using that model will, given the complexities of deployment, see us implementing yesterday’s solution to today’s problem,’ Piper adds.
He argues that domestic governments seeking to raise revenue through unilateral digital services taxes could raise even more tax, and cut their need for spending by focusing on other areas of their domestic tax systems. ‘That’s where we would encourage them to direct their attention, while allowing time to get the international approach to digital taxes right,’ he says.
