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OECD Says Digital Tax Plans Will Boost Most States' Revenues

by Ulrika Lomas, Tax-News.com, Brussels

20 February 2020


During a February 13, 2020, webcast, the OECD presented economic analysis on the potential impact of what it has proposed on international tax reform to address the digitalization of the economy.

The OECD has said that the changes would have a significant positive impact on global tax revenues, by boosting corporate income tax revenues globally by about four percent. The OECD anticipates that the changes would increase tax payments by consumer-facing, digital economy businesses by about USD100bn annually.

Importantly in terms of achieving a global consensus on the new rules, the OECD believes that the benefits will be relatively equal for high, middle, and low income economies.

The OECD's digital tax plans

In May 2019 the Inclusive Framework agreed a Program of Work for Addressing the Tax Challenges of the Digitalization of the Economy. The Program of Work is divided into two pillars:

  • Pillar One addresses the allocation of taxing rights between jurisdictions and considers various proposals for new profit allocation and nexus rules;
  • Pillar Two (also referred to as the "Global Anti-Base Erosion" or "GloBE" proposal) calls for the development of a co-ordinated set of rules to address ongoing risks from structures that allow MNEs to shift profit to jurisdictions where they are subject to no or very low taxation.

The OECD's GloBE proposal is designed to give jurisdictions a remedy in cases where income is subject to no or only very low taxation. The proposal 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 has proposed.

The OECD intends that the GloBE proposal will operate as a top-up to an agreed fixed rate. The actual rate of tax to be applied under the GloBE proposal will be discussed once other key design elements of the proposal are fully developed, the OECD has said.

Recently the 137-member BEPS Inclusive Framework reaffirmed its commitment to working towards an international consensus on the package, following the presentation by the OECD of the granular details.

New economic analysis

The economic analysis and impact assessment of the Pillar One and Pillar Two proposals is being undertaken to inform key decisions on the design and parameters of the tax reform to be agreed by Inclusive Framework members as part of the negotiations underway at the OECD. The analysis covers data from more than 200 jurisdictions, including all members of the Inclusive Framework, and more than 27,000 MNE groups. Assumptions in the preliminary analysis are illustrative, and do not pre-judge decisions to be taken by the Inclusive Framework, the OECD has said.

The analysis shows that the Pillar One reform - designed to re-allocate some taxing rights to market jurisdictions, regardless of physical presence - would also bring a small tax revenue gain for most jurisdictions. Under Pillar One, low and middle-income economies are expected to gain relatively more revenue than advanced economies, with investment hubs experiencing some loss in tax revenues. More than half of the profit re-allocated would come from 100 large MNE groups.

According to the OECD, the analysis shows that Pillar Two could raise a significant amount of additional tax revenues. By reducing the tax rate differentials between jurisdictions, the reform is expected to lead to a significant reduction in profit shifting by MNEs. This will be important for developing economies as, according to the OECD, they tend to be more adversely affected by profit shifting than high-income economies.

The overall direct effect on investment costs is expected to be small in most countries, as the reforms target firms with high levels of profitability and low effective tax rates. The reforms would also reduce the influence of corporate taxes on investment location decisions. The OECD concluded that failure to reach a consensus-based solution would likely lead to further unilateral measures and greater uncertainty.

TAGS: tax | investment | business | multinationals | transfer pricing | tax rates | G20 | tax reform | BEPS

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