SAU, Alm.del - 2019-20 - Endeligt svar på spørgsmål 58: Spm. om at oplyse om det mere detaljerede indhold i det tysk-franske forslag vedrørende CFC-beskatning og fradragsnægtelse, til skatteministeren

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SAU, Alm.del - 2019-20 - Endeligt svar på spørgsmål 58: Spm. om at oplyse om det mere detaljerede indhold i det tysk-franske forslag vedrørende CFC-beskatning og fradragsnægtelse, til skatteministeren SAU, Alm.del - 2019-20 - Endeligt svar på spørgsmål 58: Spm. om at oplyse om det mere detaljerede indhold i det tysk-franske forslag vedrørende CFC-beskatning og fradragsnægtelse, til skatteministeren

OECD/G20 Base Erosion and Profit Shifting Project

Programme of Work to Develop a

Consensus Solution to the Tax

Challenges Arising from the

Digitalisation of the Economy

Inclusive Framework on BEPS

This document, as well as any data and any map included herein, are without prejudice to the status of

or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the

name of any territory, city or area.

This document was approved by the OECD/G20 Inclusive Framework on BEPS at its 7

Session on 28-29

May 2019 and prepared for publication by the OECD Secretariat.

Please cite this publication as:

OECD (2019),

Programme of Work to Develop a Consensus Solution to the Tax Challenges Arising from the Digitalisation of the

Economy, OECD/G20 Inclusive Framework on BEPS,

OECD, Paris,

www.oecd.org/tax/beps/programme-of-work-to-develop-a-

consensus-solution-to-the-tax-challenges-arising-from-the-digitalisation-of-the-economy.htm.

Photo credits: Cover © fotomak/Shutterstock

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TABLE OF CONTENTS

│

Table of contents

Chapter I - Introduction ....................................................................................................................... 5

Chapter II – Revised Nexus and Profit Allocation Rules (Pillar One) ............................................. 9

1. New profit allocation rules.............................................................................................................. 12

1.1. Overview..................................................................................................................................... 12

1.2. Modified residual profit split method ......................................................................................... 12

1.3. Fractional apportionment method ............................................................................................... 14

1.4. Distribution-based approaches .................................................................................................... 15

1.5. Explore the use of business line and regional segmentation ....................................................... 16

1.6. Design scoping limitations.......................................................................................................... 17

1.7. Develop rules on the treatment of losses .................................................................................... 18

2. New nexus rules ............................................................................................................................... 18

3. Implementation of the new taxing right ........................................................................................ 20

3.1. Elimination of double taxation.................................................................................................... 20

3.2. Administration ............................................................................................................................ 21

3.3. Changing existing tax treaties ..................................................................................................... 22

Chapter III – Global anti-base erosion proposal (Pillar Two) ........................................................ 23

1. GloBE proposal................................................................................................................................ 26

2. Income inclusion rule ...................................................................................................................... 27

2.1. Top up to a minimum rate........................................................................................................... 27

2.2. Use of a fixed percentage ............................................................................................................ 27

2.3. Exploration of simplifications..................................................................................................... 28

3. Tax on base eroding payments ....................................................................................................... 30

4. Rule co-ordination, simplification, thresholds and compatibility with international

obligations ............................................................................................................................................ 32

Chapter IV – Economic analysis and impact assessment ................................................................ 33

Chapter V - Organisation of the work to deliver the programme of work and next steps ........... 37

1. Overall Approach ............................................................................................................................ 37

2. Organisation of the work ................................................................................................................ 38

3. Next Steps ......................................................................................................................................... 40

CHAPTER I - INTRODUCTION

│

Chapter I - Introduction

The digital transformation spurs innovation, generates efficiencies, and improves

services while boosting more inclusive and sustainable growth and enhancing well-being.

At the same time the breadth and speed of this change introduces challenges in many policy

areas, including taxation.

The tax challenges of the digitalisation of the economy were identified as one of

the main areas of focus of the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project,

leading to the 2015 BEPS Action 1 Report (the Action 1 Report).

The Action 1 Report

found that the whole economy was digitalising and, as a result, it would be difficult, if not

impossible, to ring-fence the digital economy.

For indirect taxes, the Action 1 Report recognised new challenges related to the

collection of Value Added Taxes (VAT)/Goods and Services Taxes (GST) on the

continuously growing volumes of goods and services that consumers purchase online from

foreign suppliers. It recommended implementing the destination principle contained in the

2017 OECD International VAT/GST Guidelines,

together with the mechanisms for

effective collection of VAT/GST on cross-border supplies of services and intangibles

presented in those Guidelines.

For direct taxes, the Action 1 Report observed that while digitalisation could

exacerbate BEPS issues, it also raises a series of broader tax challenges, which it identified

as “nexus, data and characterisation”. The latter challenges, however, were acknowledged

as going beyond BEPS, and were described as chiefly relating to the question of how taxing

rights on income generated from cross-border activities in the digital age should be

allocated among jurisdictions. A number of potential options to address these concerns

were discussed, but none were ultimately recommended. Instead, the Action 1 Report

called for continued work in this area, notably by monitoring developments in respect of

digitalisation, with a further report to be delivered by 2020.

Notwithstanding the progress made in tackling double non-taxation as part of the

BEPS package, and the widespread implementation of the OECD International VAT/GST

Guidelines, ongoing concerns around the tax implications of a rapidly digitalising economy

led the G20 Finance Ministers, at their meeting in Baden Baden in March 2017, to advance

the timeline and request the Inclusive Framework to deliver an interim report by early 2018.

In March 2018, the Inclusive Framework, working through its Task Force on the Digital

Economy (TFDE), issued

Tax Challenges Arising from Digitalisation – Interim Report

2018

(the Interim Report).

The Interim Report provided an in-depth analysis of new and

changing business models that enabled the identification of three characteristics frequently

observed in certain highly digitalised business models, namely

scale without mass, heavy

reliance on intangible assets,

and the

importance of data, user participation and their

synergies with intangible assets.

The ensuing potential tax challenges were discussed,

including remaining BEPS risks and the question of how taxing rights on income generated

from cross-border activities in the digital age should be allocated among jurisdictions.

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CHAPTER I - INTRODUCTION

While members of the Inclusive Framework did not converge on the conclusions

to be drawn from this analysis, they committed to continue working together to deliver a

final report in 2020 aimed at providing a consensus-based long-term solution, with an

update in 2019.

Conscious of the challenging time frame and the importance of the issues, the

Inclusive Framework further intensified its work after the delivery of the Interim Report.

Consistent with the analysis included in the Action 1 Report as well as the Interim Report,

some members made suggestions on how the work could be taken forward to achieve

progress towards a consensus-based solution. Some proposals focused on the allocation of

taxing rights by suggesting modifications to the rules on profit allocation and nexus, other

proposals focused more on unresolved BEPS issues. In the Policy Note

Addressing the Tax

Challenges of the Digitalisation of the Economy,

approved on 23 January 2019, the

Inclusive Framework agreed to examine and develop these proposals on a “without

prejudice” basis. These proposals were grouped into two pillars which could form the basis

for consensus:

•

Pillar One focuses on the allocation of taxing rights, and seeks to undertake a

coherent and concurrent review of the profit allocation and nexus rules;

Pillar Two focuses on the remaining BEPS issues and seeks to develop rules that

would provide jurisdictions with a right to “tax back” where other jurisdictions have

not exercised their primary taxing rights or the payment is otherwise subject to low

levels of effective taxation.

While the two issues of the ongoing work on remaining BEPS challenges and a

concurrent review of the profit allocation and nexus rules are distinct, they intersect and a

solution that seeks to address them both could have a mutually reinforcing effect. Therefore

the Inclusive Framework agreed that both issues should be discussed and explored in

parallel.

Since January 2019, and consistent with the Policy Note, the Inclusive Framework

has continued to examine the proposals, including by considering how the gaps between

the different positions of jurisdictions could be bridged, taking into consideration the

overlaps that exist between the BEPS issues exacerbated by digitalisation and the broader

tax challenges. As part of this work, a public consultation document was released on

13 February 2019, which sought input from external stakeholders on the specific proposals

examined under Pillar One and Pillar Two.

The response from stakeholders was robust

with more than 200 written submissions running to over 2,000 pages of written comments.

Stakeholders had the opportunity to express their views at the public consultation meeting

that was held at the OECD Conference Centre in Paris on 13 and 14 March 2019 and that

was attended by over 400 representatives from governments, business, civil society and

academia.

10.

This ongoing work, including the public consultation process and inputs received

from various stakeholders, has highlighted important areas that need to be discussed among

the members of the Inclusive Framework. One area is the effect of the three characteristics

noted in the Interim Report, which are more pronounced in certain highly digitalised

business models, reinforced by globalisation, and the broader challenges this may pose in

relation to existing tax rules, including by exacerbating some BEPS risks.

For some

commentators and members of the Inclusive Framework the work on the tax challenges of

digitalisation has revealed some more fundamental issues of the existing international tax

framework, which have remained after the delivery of the BEPS package.

CHAPTER I - INTRODUCTION

│

11.

A further issue is the recognition that if the Inclusive Framework does not deliver

a comprehensive consensus-based solution within the agreed G20 time frame, there is a

risk that more jurisdictions will adopt uncoordinated unilateral tax measures. A growing

number of jurisdictions are not content with the taxation outcomes produced by the current

international tax system, and have or are seeking to impose various measures or

interpretations of the current rules that risk significantly increasing compliance burdens,

double taxation and uncertainty. One of the focal points of dissatisfaction relates to how

the existing profit allocation and nexus rules take into account the increasing ability of

businesses, in certain situations, to participate in the economic life of a jurisdiction without

an associated or meaningful physical presence. An unparalleled reliance on intangibles and

the rising share of services in cross border trade are among the causes typically identified.

This dissatisfaction has created a political imperative to act in a significant number of

jurisdictions. Cognisant that predictability and stability are fundamental building blocks of

global economic growth, the Inclusive Framework is therefore concerned that a

proliferation of uncoordinated and unilateral actions would not only undermine the

relevance and sustainability of the international framework for the taxation of cross-border

business activities, but will also more broadly adversely impact global investments and

growth.

12.

This economic and political context is at the foundation of the programme of work

for each Pillar outlined in this paper, which has been developed by the Inclusive Framework

with a view to reporting progress to the G20 Finance Ministers in June 2019 and delivering

a long-term and consensus-based solution in 2020. This timeline is extremely ambitious

given the need to revisit fundamental aspects of the international tax system, but is

reflective of the political imperative that all members of the Inclusive Framework attach to

finding a timely resolution of the issues at stake.

13.

A consensus based solution to be agreed among the 129 members of the Inclusive

Framework will, in addition to the important technical work that must be carried out,

require political engagement and endorsement as the interests at stake for members go

beyond technical issues and will have an impact on revenues and the overall balance of

taxing rights. For a solution to be delivered in 2020, the outlines of the architecture will

need to be agreed by January 2020. This outline will have to include a determination of the

nature of, and the interaction between, both Pillars, and will have to reduce the number of

options to be pursued under Pillar One. The solution should reflect the right balance

between precision and administrability for jurisdictions at different levels of development,

underpinned by sound economic principles and conceptual basis. Furthermore, it would be

important to ensure a level playing field between all jurisdictions; large or small, developed

or developing. The G20 process can provide important momentum in this regard. As

indicated in the Policy Note,

the rules agreed should not result in taxation where there is

no economic profit nor should they result in double taxation.

14.

The work programme contained in this paper provides a path to finding such a

solution but will require an early political steer informed by an economic analysis and

impact assessment of the possible designs of a solution, as described in Chapter IV.

15.

Given the interlinked nature of these different elements the Steering Group of the

Inclusive Framework will play a key role in advancing this work and developing proposals

for the consideration of the Inclusive Framework.

16.

To support this process and enable the Steering Group to fulfil its mandate,

technical work, including on the economic analysis, at the subsidiary body level will start

immediately on all current proposals as needed to support the Steering Group. Once there

│

CHAPTER I - INTRODUCTION

is an agreed architecture proposed by the Steering Group and agreed by the Inclusive

Framework, the subsidiary bodies will revert to their more traditional role of working

towards the implementation of an agreed policy direction.

17.

The programme of work for the future technical work contained in this document

needs to be seen in this context. It remains dynamic throughout, recognising that new

technical issues may emerge as the work progresses. It has a preparatory focus initially and

then turns more definitive once an overall architecture has been agreed. It recognises that

there are cross-cutting issues that affect both Pillars requiring close coordination. Finally,

it recognises the need for the Steering Group to play a central and ongoing role in managing

the work and provide direction as and when needed to achieve a successful outcome.

18.

Chapter II of the document focuses on the allocation of taxing rights (Pillar One),

and describes the different technical issues that need to be resolved to undertake a coherent

and concurrent revision of the profit allocation and nexus rules.

19.

Chapter III focuses on remaining BEPS issues (Pillar Two), and describes the work

to be undertaken in the development of a global anti-base erosion (GloBE) proposal that

would, through changes to domestic law and tax treaties, provide jurisdictions with a right

to “tax back” where other jurisdictions have not exercised their primary taxing rights or the

payment is otherwise subject to low levels of effective taxation.

20.

Chapter IV discusses work to be undertaken in connection with an impact

assessment and economic analysis of the proposals.

21.

Chapter V explains how the work under both Pillars is organised and articulates the

role of the Steering Group in steering, monitoring and co-ordinating the Programme of

Work and related outputs in order to ensure that the Inclusive Framework can deliver on

its commitment to arrive at a consensus solution and produce a final report by the end of

2020. The schedule of meetings of the Inclusive Framework will be adapted accordingly.

CHAPTER I - INTRODUCTION

│

References

OECD (2015),

Addressing the Tax Challenges of the Digital Economy, Action 1 - 2015 Final

Report,

OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris,

https://doi.org/10.1787/9789264241046-en.

OECD (2017),

International VAT/GST

https://doi.org/10.1787/9789264271401-en.

Guidelines,

OECD

Publishing,

Paris,

OECD (2018),

Tax Challenges Arising from Digitalisation – Interim Report 2018: Inclusive

Framework on BEPS,

OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing,

Paris,

https://doi.org/10.1787/9789264293083-en.

OECD (2019),

Addressing the Tax Challenges of the Digitalisation of the Economy – Policy Note,

as approved by the Inclusive Framework on BEPS on 23 January 2019, OECD, Paris,

www.oecd.org/tax/beps/policy-note-beps-inclusive-framework-addressing-tax-challenges-

digitalisation.pdf.

OECD (2019), Public Consultation Document,

Addressing the Tax Challenges of the Digitalisation

of the Economy,

13 February – 6 March 2019,

www.oecd.org/tax/beps/public-consultation-

document-addressing-the-tax-challenges-of-the-digitalisation-of-the-economy.pdf.

All written submissions made to the Public Consultation Document are available at:

www.oecd.org/tax/beps/public-comments-received-on-the-possible-solutions-to-the-tax-

challenges-of-digitalisation.htm.

This matter was recently addressed in a Policy Paper released by the International Monetary Fund

(IMF), stressing that the challenges raised by digitalisation are emblematic of wider vulnerabilities

in the international tax system that cannot be addressed by small scale reforms but rather ask for a

more fundamental reconsideration (International Monetary Fund (2019),

Corporate Taxation in the

Global Economy,

Policy Paper No 19/007, Washington D.C., accessible at:

https://www.imf.org/en/Publications/Policy-Papers/Issues/2019/03/08/Corporate-Taxation-in-the-

Global-Economy-46650.

See footnote 4.

CHAPTER II – REVISED NEXUS AND PROFIT ALLOCATION RULES (PILLAR ONE)

│

Chapter II – Revised Nexus and Profit Allocation Rules

(Pillar One)

22.

Under Pillar One, three proposals have been articulated to develop a consensus-

based solution on how taxing rights on income generated from cross-border activities in

the digital age should be allocated among countries – namely, the “user participation”

proposal,

the “marketing intangibles” proposal

and the “significant economic presence”

proposal.

23.

These proposals have important differences, including the objective and scope of

the reallocation of taxing rights – hereafter, the “new taxing right”. At the same time, they

all allocate more taxing rights to the jurisdiction of the customer and/or user – hereafter,

the “market jurisdictions”

– in situations where value is created by a business activity

through (possibly remote) participation in that jurisdiction that is not recognised in the

current framework for allocating profits. Further, they have important common policy

features, as they all contemplate the existence of a nexus in the absence of physical

presence, contemplate using the total profit of a business, contemplate the use of

simplifying conventions (including those that diverge from the arm’s length principle) to

reduce compliance costs and disputes – a feature supported by many commentators at the

public consultation, who expressed concerns about approaches that would add complexity

to existing tax rules –, and would operate alongside the current profit allocation rules.

24.

Hence, although further work will be conducted in parallel to reach a political

agreement on the objective and scope of a unified approach, the existing commonalities

suggest that there is sufficient scope to establish a programme of work considering together

some key design features of a consensus-based solution under Pillar One. The technical

issues that need to be resolved under the programme of work may be grouped into three

building blocks, namely:

•

different approaches to determine the amount of profits subject to the new taxing

right and the allocation of those profits among the jurisdictions;

the design of a new nexus rule that would capture a novel concept of business

presence in a market jurisdiction reflecting the transformation of the economy, and

not constrained by physical presence requirement; and

different instruments to ensure full implementation and efficient administration of

the new taxing right, including the effective elimination of double taxation and

resolution of tax disputes.

•

25.

The programme of work will invite subsidiary bodies to explore these issues and

assess their implications, with a view to assisting the Steering Group to reach a unified

approach on Pillar One which will facilitate a political agreement.

│

CHAPTER II – REVISED NEXUS AND PROFIT ALLOCATION RULES (PILLAR ONE)

1. New profit allocation rules

1.1. Overview

26.

The new taxing right requires a method to quantify the amount of profit reallocated

to market jurisdictions, and a method to determine how that profit should be allocated

among the market jurisdictions entitled to tax under the new taxing right. The different

methods suggested so far to determine the profit subject to the new taxing right will be

further explored, including the possible use of more simplifications to minimise compliance

costs and disputes.

27.

Due consideration will be given to concerns about the complexity and uncertainty

of the methods articulated so far, and the possible advantages of using other simplified

approaches. Additionally, this work will consider the feasibility of business line or regional

segmentations, different mechanisms to allocate the profit to the relevant market

jurisdictions, the design of various scoping limitations and alternative treatments of losses.

It is recognised that, due to the nature and the variety of possible approaches that are to be

considered in this work, the scope of the work may need to be adapted as the work

progresses.

1.1. New profit allocation rules

The programme of work would explore issues and options in connection with new profit

allocation rules. These issues and options are expected to include:

1) The development of conceptually underpinned methods for determining the

amount of profit and loss subject to the new taxing right, consistent with the

principle of avoiding double taxation;

2) The use of simplification measures where appropriate to limit the burden of the

new rules on tax administrations and taxpayers alike; and

3) An assessment of the administrability of the features of any proposal, taking into

consideration capacity and resource constraints.

1.2. Modified residual profit split method

28.

The MRPS method would allocate to market jurisdictions a portion of an MNE

group’s non-routine profit that reflects the value created in markets that is not recognised

under the existing profit allocation rules. It involves four steps: (i) determine total profit to

be split; (ii) remove routine profit, using either current transfer pricing rules or simplified

conventions; (iii) determine the portion of the non-routine profit that is within the scope of

the new taxing right, using either current transfer pricing rules or simplified conventions;

and (iv) allocate such in-scope non-routine profit to the relevant market jurisdictions, using

an allocation key.

CHAPTER II – REVISED NEXUS AND PROFIT ALLOCATION RULES (PILLAR ONE)

│

29.

The programme of work will explore the issues and alternative options associated

with each of these steps, including possible simplifications. Further, given that the scope

of the new taxing right is not intended to cover all profit, the MRPS method will coexist

with the existing transfer pricing rules and rules for coordinating these two sets of rules

will be necessary to provide certainty and minimise disputes.

1.2.

Modified Residual Profit Split

The programme of work would explore options and issues relating to a modified residual

profit split method. These issues and options are expected to include:

1) The development of rules that govern how total profits should be computed for

purposes of applying the Modified Residual Profit Split (“MRPS”) method.

a. This requires consideration of the suitability of using accounting rules for the

computation of total profits, the relevant measure of profit to be used (such as

pre-tax profit etc.), and what adjustments (if any) would be appropriate.

b. It also requires an evaluation of the relative merits of determining total profits:

on a group-wide basis, including how this approach could be integrated

with the existing international tax system to ensure that a group could

identify which entity’s or entities’ profit is subject to the new taxing right

exercised by a particular jurisdiction; or

on an entity or aggregated entity basis, including how the entity or entities

in scope could be identified and, where multiple entities are identified, how

the combined profits of these entities would be reallocated under the new

taxing right.

ii)

2) The development of rules to bifurcate total profit into routine and non-routine

components. This would require an evaluation of the relative merits of using

current transfer pricing rules and simplified approaches. In particular,

a. The evaluation of using current transfer pricing rules would include

consideration of the following:

ii.

the impact of future transfer pricing disputes (which can take a number of

years to conclude) on routine and non-routine profit computations; and

the mechanisms that local tax administrations would require to confirm the

amount of non-routine profits.

b. The evaluation of using simplified approaches would include consideration of

possible proxies for the determination of non-routine profit.

3) The development of rules to quantify the portion of non-routine profit subject to

the new taxing right. This would include an evaluation of the relative merits of

using the approaches set forth below.

a. The adaptation of the current transfer pricing rules, taking into account the

issues raised above.

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CHAPTER II – REVISED NEXUS AND PROFIT ALLOCATION RULES (PILLAR ONE)

b. The use of a proxy based on capitalised expenditures. This would include

consideration of:

ii.

iii.

how costs relating to the activities and assets in and out of scope of the new

taxing right should be identified;

how the “useful lives” of different categories of expenditure and investment

should be determined and applied; and

how concerns that cost may not always be an appropriate indicator of value

could be addressed.

c. The use of a proxy based on projections of future income.

d. The use of a proxy based on fixed percentages of total non-routine income,

including the possibility of using different fixed percentages for different lines

of business.

e. Such other proxies as may be developed by the detailed work in this area.

4) The development of rules to allocate the identified profit subject to the new taxing

rights among the relevant market jurisdictions. This requires the evaluation of

possible allocation keys, such as revenues.

5) The integration of the MRPS method with the existing transfer pricing rules

without giving rise to double taxation or double non-taxation.

6) Other technical issues that arise from the exploration of the above topics,

recognising that the detailed points discussed above may need to be adapted as the

work progresses.

A fundamental issue associated with the MRPS method is whether it would be applied

to an MNE group as a whole, or whether it would separately take into account different

business lines and geographical regions. That topic is addressed below.

1.3. Fractional apportionment method

30.

The fractional apportionment method involves the determination of the amount of

profits subject to the new taxing rights without making any distinction between routine and

non-routine profit. One possible approach to assessing the profit derived by a non-resident

enterprise is to take into account the overall profitability of the relevant group (or business

line). This method would involve three steps: (i) determine the profit to be divided, (ii)

select an allocation key, and (iii) apply this formula to allocate a fraction of the profit to

the market jurisdiction(s).

31.

In exploring the development of a fractional apportionment method, the programme

of work will explore a number of issues, including:

•

Determining options for the starting point of the computation of the relevant profits

subject to the fractional apportionment mechanism. Such options may include the

profit of the selling entity as determined by the current transfer pricing rules, or by

applying a global profit margin to local sales, or by any other measures as may be

considered appropriate.

CHAPTER II – REVISED NEXUS AND PROFIT ALLOCATION RULES (PILLAR ONE)

│

•

Explore different allocation keys that could be taken into account in constructing

the formula that would be used to apportion the relevant profit.

Addressing the interaction between the current profit allocation framework with the

fractional apportionment approach, especially if a decision is made to adjust the

amount of profit allocated to the market jurisdiction based on the overall

profitability of the relevant group or business line.

1.3.

Fractional apportionment

The programme of work would explore issues and options relating to a fractional

apportionment method. These issues and options are expected to include:

1) The development and evaluation of a method to determine the profits of a non-resident

entity or group that would be subject to the fractional apportionment mechanism,

including the possibility of taking into account overall profitability.

2) The financial accounting regime and measure upon which the profit determination

would be based for this purpose.

3) The factors, including employees, assets, sales, and users, that could be taken into

account in constructing the formula that would be used to apportion the relevant profit.

4) The design of rules to coordinate the effect of the fractional apportionment method and

the current transfer pricing system, without giving rise to double taxation or double

non-taxation. This would include, for example, rules related to how the burden of the

new taxing right might be shared with other entities in the MNE group where the profits

of a non-resident entity take into account the overall profitability of the group.

1.4. Distribution-based approaches

32.

Consistent with the strong demand for simplicity and administrability, the

programme of work will also explore other possible simplified methods. This includes

consideration of a simplified approach grounded in the twin considerations of the interest

in allocating more profit to market jurisdictions and reducing the ongoing controversies

associated with the proper pricing of marketing and distribution activities. In contrast to the

MRPS method, this approach might address, in addition to non-routine profit, profit arising

from routine activities associated with marketing and distribution.

33.

One possibility would be to specify a baseline profit in the market jurisdiction for

marketing, distribution and user-related activities. Other options might also be considered,

for example, the baseline profit could increase based on the MNE group’s overall

profitability. Through this mechanism, some of the MNE group’s non-routine profit would

be reallocated to market jurisdictions. The baseline profit could also be modified by

additional variables to accommodate, for instance, industry and market differences.

34.

The design of such an approach would require consideration of whether it would

envisage allocating to market jurisdictions a profit which would be a final allocation – i.e.

an allocation which taxpayers or tax authorities would not be able to re-evaluate under the

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CHAPTER II – REVISED NEXUS AND PROFIT ALLOCATION RULES (PILLAR ONE)

current transfer pricing rules. Alternatively, such a simplified approach could be designed

to allow the allocation of a higher return under traditional transfer pricing principles to

market jurisdictions, such as in those cases where a local distribution company owns and

controls all the risks for highly profitable marketing intangibles.

35.

In scenarios involving a remote activity, an issue that will need to be explored is

whether the amount of profit (including any baseline profit) taxable by that market

jurisdiction would be the same as for locally-based marketing and distribution activities, or

whether that amount should be reduced in some formulaic manner.

1.4. Distribution-based approaches

The programme of work would explore issues and options related to distribution-based

approaches. These issues and options are expected to include:

1) The development of rules providing a baseline amount of profit attributable to

marketing, distribution, and user-related activities.

2) The assessment of whether and how a baseline amount could be adjusted based on

a group’s overall profitability and other relevant factors to effectively allocate a

proportion of routine and non-routine profits to market jurisdictions. This could

include consideration of how concerns that cost may not always be an appropriate

indicator of value could be addressed.

3) The assessment of whether the baseline could function as a minimum or maximum

return.

4) The assessment of whether and how any such adjusted profits or returns could be

applied where the relevant group has no established tax presence in the market

jurisdiction.

5) How the approach could be coordinated with the current transfer pricing system

without giving rise to double taxation or double non-taxation.

1.5. Explore the use of business line and regional segmentation

36.

The profitability of a MNE group can vary substantially across different business

lines and regions. To avoid unintended outcomes and distortions, and ensure a proper

balance between simplicity and precision, the programme of work will explore the

possibility of determining the profits subject to the new taxing right on a business line

and/or regional basis.

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1.5. Business line and regional segmentation

The programme of work would explore issues and options for business line and regional

segmentation. These issues and options are expected to include:

1) The design of rules to define and delineate among different business lines for the

purposes of applying the approaches described above, and an evaluation of the

administrability associated with such rules. As elsewhere, these rules would need

to be administrable for taxpayers and tax administrations with different capability

and resource constraints. In developing these rules consideration would be given

to (i) the information MNE groups already prepare (e.g. for accounting, securities

law, or regulatory purposes); (ii) the extent to which this information could be used

reliably to segment MNE groups by business line; and (iii) any other required

information.

2) The design of rules or principles to allow the regional segmentation of an MNE

group’s activities for the purposes of applying the approaches described above.

These rules or principles could need to consider many of the same issues identified

for business line segmentation.

1.6. Design scoping limitations

37.

To the extent that the activities and assets within the scope of the new taxing right

would not be undertaken or exploited by all businesses, scope limitations may be

appropriate. The programme of work will explore different limitations that could operate

either by reference to the nature (e.g. through negative exclusions, safe harbours, and/or

other screening criteria) or the size (e.g. thresholds based on revenue or other relevant

factors) of a given business. In this task, due consideration will be given to the feasibility

of business line segmentations and any legal constraint arising from other international

obligations. Due consideration will also be given to whether or to what extent any new

taxing right would apply to certain items such as commodities and other primary products,

and financial instruments.

1.6. Design scope limitations

The programme of work would explore issues and options in connection with design

scoping limitations. These issues and options are expected to include:

1) Potential limitations on the scope of the new taxing right. This work would include

the development of rules to limit the scope of the new taxing right based on the size

of a MNE group or business line. It would also include an evaluation of rules that

could focus the scope of the rules on businesses that are of a type to which the rules

should apply.

2) Consideration would also be given to whether any scope limitations are legally

constrained by other international obligations, e.g. trade regulations.

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CHAPTER II – REVISED NEXUS AND PROFIT ALLOCATION RULES (PILLAR ONE)

1.7. Develop rules on the treatment of losses

38.

It is important that the new profit allocation rules have effective application to both

profits and losses. The programme of work will explore the different options available for

the treatment of losses under the new taxing right.

1.7. Treatment of losses

The programme of work would explore issues and options in connection with the design

of rules for the treatment of losses. These issues and options are expected to include:

1) The development of profit allocation rules that apply symmetrically to profits and

losses. This should include consideration of the practical consequences of this

approach, such as when and how a loss-making MNE group would be required to

file a tax return in market jurisdictions.

2) The development of an “earn out” approach to losses, wherein an MNE group

would maintain a notional cumulative loss account, and profits would be subject to

the new taxing right only once that cumulative loss account had been reduced to

zero by subsequent profits.

3) The development of a hybrid system incorporating elements of the symmetric

treatment of losses and “earn out” approach could also be considered.

4) The determination of whether all or a defined subset of the losses of an MNE group

(such as carry-forward losses, losses in relation to a particular business line, or

losses in a particular region/jurisdiction) should be taken into account under the

approaches described above.

2. New nexus rules

39.

The work programme will explore the development of a concept of remote taxable

presence (i.e. a taxable presence without traditional physical presence) and a new set of

standards for identifying when such a remote taxable presence exists. The work programme

will also consider a new concept of taxable income sourced in (i.e. derived from) a

jurisdiction. This taxing right would generally not be constrained by physical presence

requirements.

40.

Developing a new non-physical presence nexus rule to allow market jurisdictions

to tax the measure of profits allocated to them under the new profit allocation rules would

require an evaluation of the relative merits of alternative approaches, including:

•

amendments to the definition of a “permanent establishment” (PE) in Article 5 of

the OECD Model Convention,

and potential ensuing changes to Article 7 of the

OECD Model Convention;

development of a standalone rule establishing a new and separate nexus, either

through a new taxable presence or a concept of source.

•

CHAPTER II – REVISED NEXUS AND PROFIT ALLOCATION RULES (PILLAR ONE)

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2.1. New nexus rules

rule and other treaty related issues

The programme of work would explore options and issues related to a new nexus rule.

These options and issues are expected to include:

1. The development of a new nexus rule that would capture a novel concept of a

business presence in a market jurisdiction reflecting the transformation of the

economy and not constrained by physical presence requirements, and which would

allow market jurisdictions to exercise taxing rights over the measure of profits

allocated to them under the new profit allocation rules. This would require an

evaluation of the relative merits of alternative approaches, including the making of

recommendations on:

a. Amending Articles 5 and 7 of the OECD Model Convention to deem a PE to

exist where an MNE exhibits a remote yet sustained and significant

involvement in the economy of a jurisdiction and to accommodate the new

profit allocation rules. This would also require a consideration of any impact

of such an amendment on other provisions that use the PE concept (Articles 10-

13, 15, 21, 22, and 24) and other issues (such as VAT and social security

contributions).

b. Alternatively, introducing a new standalone provision giving market

jurisdictions a taxing right over the measure of profits allocated to them under

the new profit allocation rules, which would require:

‒

identifying and defining a new non-physical taxable presence separate from

the PE concept;

identifying and defining a new concept of income taxable in the source

jurisdiction (i.e. income derived from a particular source in a jurisdiction);

and

the interaction between the new taxable presence or source income and

existing provisions (including especially provisions governing non-

discrimination).

‒

2. The evaluation and development of indicators of an MNE group’s remote but

sustained and significant involvement in the economy of a market jurisdiction. This

would require:

a. a sustained local revenue threshold (both monetary and temporal); and

b. a range of additional indicators which, in combination with sustained local

revenues, would be taken to demonstrate a link beyond mere selling between

those revenues and the MNE’s interaction with the economy of a jurisdiction.

3. The necessity to change any other treaty provision, such as Article 9, to allow

market jurisdictions to exercise taxing rights over the measure of profits allocated

to them under the new nexus and profit allocation rules.

4. The considerations to ensure tax certainty, administrability, and effective dispute

prevention and resolution.

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CHAPTER II – REVISED NEXUS AND PROFIT ALLOCATION RULES (PILLAR ONE)

3. Implementation of the new taxing right

3.1. Elimination of double taxation

41.

The proposals under this Pillar may, depending on the design options eventually

chosen, envisage reallocating taxing rights over a proportion of an MNE group’s profit

(however defined), rather than over the profit from specific transactions or activities

undertaken by particular separate entities. It may therefore not be immediately clear which

member(s) of an MNE group should be considered to derive the relevant income. This leads

to questions about how, in practice, source jurisdictions would exercise the reallocated

taxing rights, and how residence jurisdictions would provide relief from double taxation of

the relevant income. It is also recognised that the new taxing right may raise new questions

relating to the sufficiency of existing double tax relief mechanisms.

42.

The work programme will consider those questions and, in particular, explore the

effectiveness of the existing treaty (and domestic law) provisions and the need to develop

new or enhanced provisions. Consideration would also be given to a multilateral competent

authority mutual agreement or framework that would provide additional guidance.

43.

The programme of work will also examine the current dispute prevention and

resolution procedures in the context of the new nexus and profit allocation rules and, where

necessary, make recommendations for changes or enhancements to these procedures,

including arbitration procedures, multilateral competent authority agreements, etc.

44.

Where appropriate, the work could also consider whether multilaterally co-

ordinated risk assessment could be helpful in applying the new nexus and profit allocation

rules and make recommendations accordingly. This work could be informed by the ongoing

work within the Forum on Tax Administration, including the International Compliance

Assurance Programme.

3.1. Elimination of double taxation and dispute resolution

The programme of work would explore options and issues related to the elimination of

double taxation and the avoidance and resolution of disputes in relation to the new

nexus and profit allocation rules. These options and issues are expected to include:

1) The effectiveness of the existing treaty provisions and the need to develop new or

enhanced, treaty provisions for the effective elimination of double taxation in

relation to the new nexus and profit allocation rules. This work should examine, in

particular:

a. The extent to which, under the new profit allocation rules, the clear

identification of the relevant taxpayer in respect of the income that is

reallocated would allow the existing treaty and domestic law mechanisms for

eliminating double taxation to continue to operate as intended.

b. The effectiveness of the existing mechanism for addressing economic double

taxation by way of appropriate adjustments under Article 9(2) of the OECD

Model Convention and the need for this mechanism to be updated or

supplemented in relation to the new profit allocation rules.

CHAPTER II – REVISED NEXUS AND PROFIT ALLOCATION RULES (PILLAR ONE)

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c. The effectiveness of the existing mechanisms for eliminating juridical double

taxation by using the exemption or credit method and the need for those

mechanisms to be updated or supplemented in relation to the new profit

allocation rules.

2) The interaction between the new taxing right and existing taxing rights – in

particular those permitting the imposition of withholding taxes on payments (such

as royalty payments or payments for services) forming part of the reallocated

income. Appropriate recommendations for the development of rules or guidance

designed to coordinate the application of these taxing rights in the market

jurisdiction would also be explored.

3) The current dispute prevention and resolution procedures, in the context of the new

nexus and profit allocation rules. Where necessary, appropriate recommendations

for changes or enhancements to these rules would be made. In particular, given

that, under some design options, the new approaches will have a more multilateral

focus, the work would examine the extent to which these existing procedures need

updating because they have focused largely on solving bilateral disputes. This will

require, in particular, the evaluation of the need for multilateral approaches to

dispute avoidance and resolution.

4) The consideration for multilaterally co-ordinated risk assessment in applying the

new nexus and profit allocation rules. This work should be informed by the ongoing

work within the Forum on Tax Administration.

3.2. Administration

45.

The implementation of any of the approaches would first require identifying the

taxpayer who bears the tax liability and the filing obligations. Where the tax liability is

assigned to an entity that is not a resident of the taxing jurisdiction, it would be necessary

to address the required enforcement and collection arrangements. The work programme

will need to examine, and develop recommendations to address, these enforcement and

collection issues.

46.

One option could be to design simplified registration-based collection mechanisms.

A simplified registration-based collection mechanism, together with enhanced exchange of

information and cooperation mechanisms may be sufficient for compliance and collection

purposes. However, as a complementary measure, a withholding tax mechanism will also

be explored in the work programme, where it does not lead to double taxation.

47.

The effective application of any of the approaches would likely require a number

of data points (e.g. total profit, total profit per business line, sales, users etc.) to be available

not only to the tax administrations, but also to the MNE group and the taxpayer itself. In

all events, the implementation of any of the approaches would likely result in the need for

new data, documentation and reporting obligations. The work programme will develop

recommendations for a system to report and disseminate information needed to administer

the new taxing right. One option for such a system could be based on the existing

framework and technology used for the exchange of country-by-country reports under

BEPS Action 13. The data points could be included on a separate report, as the CbC reports

are limited to assist with risk assessment.

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CHAPTER II – REVISED NEXUS AND PROFIT ALLOCATION RULES (PILLAR ONE)

48.

The work programme will furthermore need to examine the challenges that may

arise in determining and reporting the location of sales.

3.2. Administration

The programme of work would explore options and issues in connection with the

administration of the new taxing right. These options and issues are expected to

include:

1) The development of measures needed for the effective administration of the new

taxing right. This work will explore collection mechanisms including a withholding

tax, reporting obligations and mechanisms to disseminate that information to the

tax authorities.

2) The technical and practical issues that may arise in determining and reporting the

location of sales, including:

a. establishing the final destination of remote sales, sales to a market through third

party intermediaries located in a third country, sales in multi-sided business

models where the users/consumers are located in different jurisdictions, sales

of intermediate goods, and destination of services;

b. the need for new reporting obligations; and

c. the need for new and/or revised protocols for the exchange of information

between jurisdictions.

3.3. Changing existing tax treaties

49.

Any proposal seeking an allocation of taxing rights over a portion of a non-resident

enterprise’s business profits in the absence of physical presence and computed other than

in accordance with the arm’s length principle would require changes to existing tax treaties

if they are to be successfully implemented. Different approaches could be envisaged to

streamline the implementation of these changes and these options would need to be further

assessed in the work programme in light of the precise nature of the changes to be made.

CHAPTER II – REVISED NEXUS AND PROFIT ALLOCATION RULES (PILLAR ONE)

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3.3. Modifying Tax Treaties

The programme of work would explore options and issues related to modifying existing

tax treaties, with the aim of ensuring that all parties committing to the changes can

implement them at substantially the same time. These options and issues are expected

to include:

1. Ways to coordinate the effective implementation of the tax treaty changes required

to introduce the new nexus and profit allocation rules and address the challenges

that arise in relation to the elimination of double taxation and the resolution of

associated disputes.

2. The relative merits of implementing these treaty changes by amending or

supplementing the

Multilateral Convention to Implement Tax Treaty Related

Measures to Prevent BEPS

(MLI) to further modify existing treaties, or by

establishing a new multilateral convention.

References

See paragraphs 17-28 of the Public Consultation Document.

See paragraphs 29-49 of the Public Consultation Document.

See paragraphs 50-54 of the Public Consultation Document.

In the context of the programme of work, the term “market jurisdiction” refers to the jurisdiction

where the customers of the business are located or, in the case of businesses that supply services to

other businesses, the jurisdiction where those services are used. In the context of many digitalised

business models, this definition would cover the jurisdiction where the user is located either because

the user acquires goods or services directly from the on-line provider or because the on-line provider

provides services to another business (such as advertising) targeting such users.

What matters, of course, is what is in existing bilateral or multilateral tax treaties – whether these

are based on the OECD Model Convention or not. But for clarity and convenience this note talks

about the OECD Model Convention.

CHAPTER III – GLOBAL ANTI-BASE EROSION PROPOSAL (PILLAR TWO)

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Chapter III – Global anti-base erosion proposal

(Pillar Two)

50.

Under Pillar Two, the Members of the Inclusive Framework have agreed to explore

an approach that leaves jurisdictions free to determine their own tax system, including

whether they have a corporate income tax and where they set their tax rates

, but considers

the right of other jurisdictions to apply the rules explored further below where income is

taxed at an effective rate below a minimum rate. Within this context, and on a without

prejudice basis, the members of the Inclusive Framework have agreed a programme of

work that contains exploration of an inclusion rule, a switch over rule, an undertaxed

payment rule, and a subject to tax rule. They have further agreed to explore, as part of this

programme of work, issues related to rule co-ordination, simplification, thresholds,

compatibility with international obligations and any other issues that may emerge in the

course of the work.

51.

Consistent with the Policy Note

Addressing the Tax Challenges of the Digitalising

Economy,

approved on 23 January 2019, Members of the Inclusive Framework agree that

any rules developed under this Pillar should not result in taxation where there is no

economic profit nor should they result in double taxation.

52.

This part sets out the global anti-base erosion (GloBE) proposal which seeks to

address remaining BEPS risk of profit shifting to entities subject to no or very low taxation

It first provides background including the proposed rationale for the proposal and then

summarises the mechanics of the proposed rules together with a summary of the issues that

will be explored as part of the programme of work.

53.

While the measures set out in the BEPS package have further aligned taxation with

value creation and closed gaps in the international tax architecture that allowed for double

non-taxation, certain members of the Inclusive Framework consider that these measures do

not yet provide a comprehensive solution to the risk that continues to arise from structures

that shift profit to entities subject to no or very low taxation. These members are of the

view that profit shifting is particularly acute in connection with profits relating to

intangibles, prevalent in the digital economy, but also in a broader context; for instance

group entities that are financed with equity capital and generate profits, from intra-group

financing or similar activities, that are subject to no or low taxes in the jurisdictions where

those entities are established.

54.

The global anti-base erosion proposal is made against this background. It is based

on the premise that in the absence of multilateral action, there is a risk of uncoordinated,

unilateral action, both to attract more tax base and to protect existing tax base, with adverse

consequences for all countries, large and small, developed and developing as well as

taxpayers. It posits that global action is needed to stop a harmful race to the bottom, which

otherwise risks shifting taxes to fund public goods onto less mobile bases including labour

and consumption, effectively undermining the tax sovereignty of nations and their elected

legislators. It maintains that developing countries, in particular those with smaller markets,

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CHAPTER III – GLOBAL ANTI-BASE EROSION PROPOSAL (PILLAR TWO)

may also lose in such a race. Over recent decades, tax incentives have become more

widespread in developing countries as they seek to compete to attract and retain foreign

direct investment.

Some studies have found that, in developing countries, tax incentives

may be redundant in attracting investment.

Revenue forgone from tax incentives can also

reduce opportunities for much-needed public spending on infrastructure, public services or

social support, and may hamper developing country efforts to mobilise domestic resources.

There is evidence that tax incentives are frequently provided in developing countries in

circumstances where governments are confronted with pressures from businesses to grant

them.

Depending on its ultimate design, the GloBE proposal could effectively shield

developing countries from the pressure to offer inefficient incentives and in doing so help

them in better mobilising domestic resources by ensuring that they will be able to

effectively tax returns on investment made in their countries. The proposal therefore seeks

to advance a multilateral framework to achieve a balanced outcome which limits the

distortive impact of direct taxes on investment and business location decisions. The

proposal is also intended as a backstop to Pillar One for situations where the relevant profit

is booked in a tax rate environment below the minimum rate.

55.

Recognising, as stated in the Action 1 Report, that it would be difficult, if not

impossible, to ring-fence the digital economy from the rest of the economy for tax purposes,

the scope of the anti-base erosion proposal is not limited to highly digitalised businesses.

By focusing on the remaining BEPS challenges, it proposes a systematic solution designed

to ensure that all internationally operating businesses pay a minimum level of tax. In so

doing, it helps to address the remaining BEPS challenges linked to the digitalising

economy, where the relative importance of intangible assets as profit drivers makes highly

digitalised business often ideally placed to avail themselves of profit shifting planning

structures.

1. GloBE proposal

56.

The proposal seeks to address the remaining BEPS challenges through the

development of two inter-related rules:

1) an

income inclusion rule

that would tax the income of a foreign branch or a

controlled entity if that income was subject to tax at an effective rate that is below

a minimum rate; and

2) a

tax on base eroding payments

that would operate by way of a denial of a

deduction or imposition of source-based taxation (including withholding tax),

together with any necessary changes to double tax treaties, for certain payments

unless that payment was subject to tax at or above a minimum rate.

57.

These rules would be implemented by way of changes to domestic law and double

tax treaties and would incorporate a co-ordination or ordering rule to avoid the risk of

economic double taxation that might otherwise arise where more than one jurisdiction

sought to apply these rules to the same structure or arrangements.

58.

The combined rules are intended to affect behaviour of taxpayers and jurisdictions

alike which is expected to limit the revenue impact of rule order for jurisdictions. Rather,

rule order will need to be determined by reference to principles of good rule design

including effectiveness, simplicity and transparency.

CHAPTER III – GLOBAL ANTI-BASE EROSION PROPOSAL (PILLAR TWO)

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2. Income inclusion rule

59.

The income inclusion rule would operate as a minimum tax by requiring a

shareholder in a corporation to bring into account a proportionate share of the income of

that corporation if that income was not subject to an effective rate of tax above a minimum

rate. This rule could supplement a jurisdiction’s CFC rules.

60.

The income inclusion rule would ensure that the income of the MNE group is

subject to tax at a minimum rate thereby reducing the incentive to allocate returns for tax

reasons to low taxed entities. The income inclusion rule would have the effect of protecting

the tax base of the parent jurisdiction as well as other jurisdictions where the group operates

by reducing the incentive to put in place intra-group financing, such as thick capitalisation,

or other planning structures that shift profit to those group entities that are taxed at an

effective rate of tax below the minimum rate.

2.1. Top up to a minimum rate

61.

The work programme would explore an inclusion rule that would impose a

minimum tax rate. This approach is consistent with a policy of establishing a floor on tax

rates by ensuring that a multinational enterprise (MNE) would be subject to tax on its global

income at the minimum rate regardless of where it was headquartered. Consideration could

be given to an exception to this principle in the case of income taxed below the minimum

rate and benefiting from a harmful preferential regime, which would then be taxed at the

higher of the minimum rate or the full domestic rate.

62.

In general terms, it is contemplated that this rule would apply where the income is

not taxed at least at the minimum level – that is, it would operate as a top up to achieve the

minimum rate of tax.

A top-up to a minimum rate increases the likelihood of the proposal

resulting in a transparent and simple global standard that sets a floor for tax competition

and makes it easier to develop consistent and co-ordinated rules. It would further increase

the likelihood of achieving a level playing field for both jurisdictions and MNEs and

reduces the incentive for inversions and other restructuring transactions designed to take

advantage of low effective rates of taxation below the threshold.

63.

A minimum tax tied to each country’s corporate income tax (CIT) rate would result

in a more complex and opaque international framework given the significant variance in

CIT rates across Inclusive Framework members. For jurisdictions with high domestic CIT

rates, such a design would create a cliff-edge effect for income that was subject to tax at

around the minimum tax rate threshold.

2.2. Use of a fixed percentage

64.

The work programme would explore an approach using a fixed percentage rather

than a percentage of the parent jurisdiction’s CIT rate or a range or corridor of CIT rates.

65.

While there is precedent in the CFC context for using a percentage of the parent

jurisdiction’s CIT rate, this approach would give rise to significant variations in the rates

used under the inclusion rule, which would result in a rule that is not in line with the

intended policy of the GloBE proposal in addressing the risks associated with low-taxation.

It would not result in a level playing field and make it difficult to co-ordinate such a rule

with the undertaxed payments rule, significantly increasing the risk of double taxation.

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CHAPTER III – GLOBAL ANTI-BASE EROSION PROPOSAL (PILLAR TWO)

66.

Another possible approach would be to use a range or corridor of minimum rates

depending on other design elements of the inclusion rule that impact on the effective rate

of tax. However, it would be difficult for jurisdictions to quantify the impact of different

design features and determine how that translates to an appropriate rate thereby resulting

in potentially arbitrary and less transparent outcomes, making it harder for jurisdictions to

co-ordinate their rules, thereby increasing compliance and administration costs and leading

to a greater risk of double taxation.

67.

An approach based on a fixed percentage tax rate is the simplest option from a

design perspective. It provides greater transparency and facilitates rule co-ordination,

thereby reducing administration and compliance costs. It also helps maintain a level playing

field for jurisdictions and taxpayers and reduces the incentives for tax driven inversions

and other restructuring transactions.

2.3. Exploration of simplifications

68.

The programme of work starts from the proposition that in principle the tax base

would be determined by reference to the rules that jurisdictions already use for calculating

the income of a foreign subsidiary under their CFC rules, or in the absence of CFC rules,

for domestic CIT purposes. Such an approach means, however, that each subsidiary of an

MNE would need to recalculate its income in accordance with the tax base calculations in

the parent jurisdiction. This may result in significant compliance costs and lead to situations

where technical and structural differences between the calculation of the tax base in the

parent and subsidiary jurisdiction could result in an otherwise highly taxed subsidiary being

treated as having a low effective rate of tax for reasons unrelated to the policy drivers

underlying the GloBE proposal.

69.

For example, differences between countries in the treatment of carry forward losses

and the timing of recognition of income and expenses could impact on the calculation of

the effective rate of tax in different jurisdictions. Structural differences in the design of

different jurisdictions’ tax bases could result in the application of the rule in cases that

might not give rise to the policy concerns that are intended to be addressed by the inclusion

rule.

70.

In order to improve compliance and administrability for both taxpayers and tax

administrations and to neutralise the impact of structural differences in the calculation of

the tax base, the programme of work will explore simplifications. Simplifications could

also serve to make the rules more transparent and help with co-ordination in the operation

of the rules.

71.

One simplification could be to start with relevant financial accounting rules subject

to any agreed adjustments as necessary. The starting point for such an approach could be

the financial accounts as prepared under the laws and relevant accounting standards of the

jurisdiction of incorporation or establishment, which would be subject to agreed upon

adjustments to reflect timing and permanent differences between tax and financial

accounting rules. Other simplification measures could also be explored as part of the

programme of work.

CHAPTER III – GLOBAL ANTI-BASE EROSION PROPOSAL (PILLAR TWO)

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2.1. Inclusion Rule

The programme of work would explore options and issues in connection with the design

of the income inclusion rule. These options and issues are expected to include:

1) A design that operates as a top up to a minimum rate but with an inclusion at the

full rate for income taxed at below the minimum rate and benefitting from a harmful

preferential regime;

2) A test for determining when income has been subject to tax at a minimum effective

rate whereby:

a. the tax rate would be based on a fixed percentage;

b. the tax base would in principle be determined by reference to the rules

applicable in the shareholder jurisdiction, but

c. the design would consider simplifications with a view to reduce compliance

costs and avoid unintended outcomes including exploring the possible use of

financial accounting rules as a basis for determining net income (with

appropriate adjustments including for losses and the timing of recognition of

income and expenses).

3) The possible use and effect of carve-outs, including for:

a. Regimes compliant with the standards of BEPS Action 5 on harmful tax

practices, and other substance based carve-outs, noting however such carve-

outs would undermine the policy intent and effectiveness of the proposal.

b. A return on tangible assets.

c. Controlled corporations with related party transactions below a certain

threshold.

4) Different options of blending,

(1)

ranging from blending at the entity level to

blending at global group level with a particular focus on blending at the

jurisdictional versus global level; and

5) All other relevant design and technical issues, including:

a. co-ordination with other international tax rules, such as withholding tax rules

and other source based taxation rules, transfer pricing rules and adjustments,

CFC and other inclusion rules;

b. co-ordination between inclusion rules where, for instance, in a tiered ownership

structure several jurisdictions may apply the rule;

c. ownership thresholds;

d. rules for the attribution of income and calculation of tax paid on that income;

and

e. rules for calculating the investor’s tax liability.

(1)

Blending refers to the ability of taxpayers to mix high-tax and low-tax income to arrive

at a blended rate of tax on income that is above the minimum rate.

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CHAPTER III – GLOBAL ANTI-BASE EROSION PROPOSAL (PILLAR TWO)

72.

There is a need to ensure that the income inclusion rule applies to foreign branches

as well as foreign subsidiaries. For example, in the case of profits attributable to exempt

foreign branches, or that are derived from exempt foreign immovable property, the income

inclusion rule could be achieved through a switch-over rule that would turn off the benefit

of an exemption for income of a branch, or income derived from foreign immovable

property, otherwise provided by a tax treaty and replace it with the credit method where

that income was subject to a low effective rate of tax in the foreign jurisdiction.

2.2. Switch-over rule

The programme of work would explore options and issues in connection with the design

of the switch-over rule. These options and issues are expected to include:

1) The design of a switch-over rule for tax treaties that would allow the state of

residence to apply the credit method instead of the exemption method where the

profits attributable to a permanent establishment (PE) or derived from immovable

property (which is not part of a PE) are subject to tax at an effective rate below the

minimum rate; and

2) A design that, as much as possible, is simple to implement and to administer.

3. Tax on base eroding payments

73.

The second key element of the proposal is a tax on base eroding payments that

complements the income inclusion rule by allowing a source jurisdiction to protect itself

from the risk of base eroding payments. More specifically, this element of the proposal

would explore:

•

undertaxed payments rule

that would deny a deduction or impose source-based

taxation (including withholding tax)

for a payment to a related party if that

payment was not subject to tax at a minimum rate; and

subject to tax rule

in tax treaties that would only grant certain treaty benefits if

the item of income was subject to tax at a minimum rate.

•

74.

The undertaxed payments rule denies a deduction or a proportionate amount of any

deduction for certain payments made to a related party unless those payments were subject

to a minimum effective rate of tax.

CHAPTER III – GLOBAL ANTI-BASE EROSION PROPOSAL (PILLAR TWO)

│

3.1. Undertaxed payments rule

The programme of work would explore options and issues in connection with the design

of the undertaxed payments rule. These options and issues are expected to include:

1) A rule that would achieve a balance between a number of design principles

including effectiveness to achieve its stated objectives, design compatibility and

co-ordination with other rules, avoidance of double taxation and taxation in excess

of economic profit, and minimising compliance and administration costs; and

2) A range of different design options including a consideration of:

a. the types of related party payments covered by the rule (including measures to

address conduit and indirect payments);

b. the test for determining whether a payment is “undertaxed”, which will include

dealing with loss situations;

c. the nature, extent and operation of the adjustment to be made under the rule

(including whether it should be on the gross amount of the payment or limited

to net income); and

d. the possible use and effect of carve-outs including those referred to in Box 2.1

above.

75.

The proposal also includes a subject to tax rule which could complement the

undertaxed payment rule by subjecting a payment to withholding or other taxes at source

and denying treaty benefits on certain items of income where the payment is not subject to

tax at a minimum rate. This rule contemplates possible modifications to the scope or

operations of the following treaty benefits, with priority given to interest and royalties:

a. The limitation on the taxation of business profits of a non-resident, unless those

profits are attributable to a permanent establishment. (Article 7 of the OECD

Model Convention)

b. The requirement to make a corresponding adjustment where a transfer pricing

adjustment is made by the other Contracting State (Article 9 of the OECD

Model Convention)

c. The limitation on taxation of dividends in the source state (Article 10 of the

OECD Model Convention)

d. The limitations on taxation of interest, royalties and capital gains in the source

state (Articles 11-13 of the OECD Model Convention)

e. The allocation of exclusive taxing rights of other income to the state of

residence (Article 21 of the OECD Model Convention)

76.

There are a number of broad issues to be explored in connection with the subject to

tax rule, including the benefits of a withholding tax over a deduction denial approach, the

degree of overlap with the undertaxed payments rule, and timing issues also considering

the overall principle that any rule should include measures to avoid double taxation.

│

CHAPTER III – GLOBAL ANTI-BASE EROSION PROPOSAL (PILLAR TWO)

77.

The proposal also contemplates the exploration of the application of a subject to

tax rule to unrelated parties as regards Articles 11 and 12 of the OECD Model Convention.

The programme of work would explore risk areas that may justify an extension to unrelated

parties or to other treaty benefits beyond interest and royalties. For instance, whether there

are certain arrangements, using structured, but otherwise unrelated arrangements that could

achieve tax outcomes inconsistent with what is intended by the GloBE proposal.

3.2. Subject to tax rule

The programme of work would explore options and issues in connection with the design

of the subject to tax rule. These options and issues are expected to include:

1) Broad issues including:

a) the need to amend bilateral tax treaties and other cost benefit considerations of

a subject to tax rule next to an undertaxed payments rule;

b) the design of a subject to tax test and the degree of overlap with the test for low

taxation under an undertaxed payments rule;

c) the operation of any withholding tax particularly where the effective rate of tax

on the payment may not be known at the time the payment is made and

including the need to address issues of possible double taxation;

d) the identification of risks that would merit the extension of the subject to tax

rules to payments between unrelated parties; and

2) Different rule designs, taking into account the specificities of the particular treaty

benefit, the learnings from work on the undertaxed payments rule limited to interest

and royalties, but also identifying risks that would merit the extension of the scope

to other types of payments.

4. Rule co-ordination, simplification, thresholds and compatibility with

international obligations

78.

Further work will also be required on rule co-ordination, simplification measures,

thresholds and carve-outs to ensure the proposal avoids the risk of double taxation,

minimises compliance and administration costs and that the rules are targeted and

proportionate. This work will address the priority in which the rules would be applied and

how they interact with other rules in the broader international framework. In this context it

is important to analyse the interaction between this proposal and other BEPS Actions. It

will also explore compatibility with international obligations (such as non-discrimination)

including, for EU members, the EU fundamental freedoms and how that compatibility

could depend on the rule’s detailed design.

CHAPTER III – GLOBAL ANTI-BASE EROSION PROPOSAL (PILLAR TWO)

│

4.1. Co-ordination, simplification, thresholds and compatibility with international

obligations

The programme of work would explore options and issues in connection with the design

of co-ordination, simplification and threshold measures including interaction with BEPS

Actions. These options and issues are expected to include:

1. Co-ordination between the undertaxed payments rule, subject to tax rule and

income inclusion rule to minimise the risk of double taxation, including

simplification measures that could further reduce compliance costs; and

2. Thresholds and carve-outs to restrict the application of the rules under the

GLOBE proposal, including:

a. Thresholds based on the turnover or other indications of the size of the

group;

De minimis

thresholds to exclude transactions or entities with small

amounts of profit or related party transactions; and

c. The appropriateness of carve-outs for specific sectors or industries.

3. Compatibility with international obligations (and, where appropriate, the EU

fundamental freedoms).

References

Previous OECD studies, including OECD (2008),

Taxation and Economic Growth,

Working Paper

No. 620, have suggested that there may be efficiency benefits in improving the design of the

corporate income tax and reducing its relative weight in a country’s tax system. However, these

studies, which were issued before the BEPS Project was launched, did not consider the proposals

currently under discussion under Pillar Two. Current proposals should be designed in a way that

preserves the ability of jurisdictions to determine their own tax systems.

Other members are of the view that the rules explored within this pillar may affect the sovereignty

of jurisdictions that for a variety of reasons have no or low corporate taxes in particular where they

target income arising from substantive activities.

See, for example, IMF, OECD, UN, and World Bank (2015),

Options for Low Income Countries' Effective

and Efficient Use of Tax Incentives for Investment,

A Report to the G-20 Development Working Group, pp.

8-9.

Ibid., pp. 11-12.

Ibid., pp. 35-36.

Countries would, of course, remain free to tax a subsidiary’s income (or particular categories of

income) at a rate higher than the minimum rate as they already do under their CFC rules.

For treaty-related aspects see the subject to tax rule.

CHAPTER IV – ECONOMIC ANALYSIS AND IMPACT ASSESSMENT

│

Chapter IV – Economic analysis and impact assessment

79.

In agreeing to explore the various proposals under the two Pillars, the Policy Note

Addressing the Tax Challenges of the Digitalising Economy,

approved on 23 January 2019,

highlighted the desire of Members of the Inclusive Framework to carry out more in-depth

analysis of each proposal and their interlinkages with a particular focus on the importance

of assessing the revenue, economic and behavioural implications of the proposals in order

to inform the Inclusive Framework in its decision making.

80.

Assessing the impact of the proposals will involve an in-depth consideration of how

they would be expected to affect the incentives faced by taxpayers and governments, their

impact on the levels and distribution of tax revenues and their overall economic effects,

including their effects on investment, innovation and growth. The impact assessment will

also need to consider how these effects vary across different kinds of MNEs, sectors and

economies.

81.

The analysis of the economic impacts of the proposals will need to draw upon the

existing public finance literature and will also require new empirical research to be

undertaken. Such research will need to rely upon the full range of available data sources,

including macro-level data (e.g., National Accounts and FDI statistics) and micro-level data

(e.g., company financial statements). To the extent that available data permits, the analysis

will need to consider the impact of the proposals on particular sectors, industries and

business models.

82.

The Secretariat has already undertaken some preliminary economic analysis to

address these questions. An update of this work was presented to the Inclusive Framework

meeting in May 2019. The preliminary analysis has considered available evidence on the

size, location, composition and potential allocation of profits under the various Pillar One

proposals. Under Pillar Two, proxies for the extent of profits that may be subject to a

minimum tax have been considered. The preliminary analysis has also considered the

broader incentive effects of the proposals, principally by drawing on the economic

literature. So far, the preliminary analysis has drawn on macro-level and micro-level data

sources, including National Accounts data, Balance of Payments data, anonymised and

aggregated Country-by-Country-Report data and ORBIS.

83.

While the economic analysis will be carried out throughout the course of the entire

period of the programme of work, the timing of this work will need to be phased in such a

way as to deliver members of the Inclusive Framework with the information required to

take decisions at key milestones. Building upon the preliminary economic analysis already

undertaken, the programme of work will require further Secretariat-led analysis to be

provided to members of the Inclusive Framework by the end of 2019. This analysis will be

designed to support members of the Inclusive Framework to take decisions in relation to

the future direction of the overall programme of work. Continued work will be carried out

during 2020, to ensure that the Inclusive Framework can be kept fully informed of the

impact of key technical decisions relating to the design of the proposals.

│

CHAPTER IV – ECONOMIC ANALYSIS AND IMPACT ASSESSMENT

84.

Noting that the various proposals are evolving as discussions continue, the

Secretariat will need to carry out a range of economic analyses in order to support the

ongoing discussions around design questions associated with the proposals.

85.

In carrying out this work, the Secretariat will need to assemble a multidisciplinary

team across a number of the OECD’s directorates. The Secretariat will carry out its work

in consultation with member jurisdictions, bilaterally, and Working Party No.2, other

international organisations (e.g., the IMF), the academic community and other

stakeholders.

4.2. Economic analysis and impact assessment

The programme of work would require that an economic analysis and impact assessment

be carried out. This analysis would explore the following key questions:

1) What are the pros and cons of the proposals with respect to the international tax

system?

2) How would the proposals affect the incentives for:

a. Taxpayers (e.g., profit shifting, investment and location of economic activity)?

b. Governments (e.g., tax competition)?

3) What is the expected economic incidence / impact of the proposals?

4) What are the expected effects of the proposals on the level and distribution of tax

revenues across jurisdictions?

5) What economic impact will the various proposals have for different types of MNEs,

sectors and economies (e.g., developing countries; resource-rich countries; R&D

intensive economies, etc.)?

6) What data sources and methodologies could jurisdictions use to assess the

proposals?

7) What are the expected regulatory costs of the proposals?

8) What would be the impact of the proposals on investment, innovation and growth?

CHAPTER V – ORGANISATION OF WORK

│

Chapter V - Organisation of the work to deliver the

Programme of Work and next steps

1. Overall approach

86.

As described in the Introduction, the work towards a consensus-based solution will

proceed along the following separate (but related) tracks:

•

first, the Steering Group will continue the process aimed at reaching an agreement

on a unified approach to addressing the issues of profit allocation and nexus under

Pillar One and agreement on the key design elements of the GloBE proposal under

Pillar Two (this work will draw on the expertise of delegates from various working

parties);

second, the subsidiary bodies will provide technical input on certain issues that may

arise in the course of developing a consensus-based solution as well as the

preparation of final reports that will set out the details of the agreement reached by

the Inclusive Framework; and

third, the Secretariat will provide an economic analysis and impact assessment of

the proposals under the two pillars.

•

87.

Although certain parts of the work can be advanced in parallel, there will be many

interactions between them. The work to be done under one track will both depend on and

drive the progress made under another. For example, the technical work to be undertaken

by the various working parties is not only expected to inform and facilitate agreement under

Pillars One and Two, but also to evolve and adapt as progress is made on the development

of a consensus-based long-term solution.

88.

Given the interlinked nature of the work and the challenging time frame for

completing it, the Steering Group of the Inclusive Framework will:

•

continue its work on the development of a unified approach under Pillar One and

the key design elements of the GloBE proposal under Pillar Two so that the outputs

from this work can be submitted to the wider Inclusive Framework for agreement;

and

•

steer, monitor and co-ordinate the work programme and related outputs produced

by different subsidiary bodies so as to ensure that a solution can be agreed and

delivered in a timely manner.

89.

Finally, new technical issues may emerge as the work advances. The programme

of work includes the exploration of all relevant issues and options in connection with the

Pillars and a subsidiary body should not disregard an option that would address a particular

issue on the basis that it has not been raised in the programme of work. To the extent

necessary, transition rules would be considered.

│

CHAPTER V – ORGANISATION OF WORK

2. Organisation of the work

90.

The technical expertise needed to deliver the measures envisaged in the programme

of work is largely found within the Inclusive Framework’s architecture, namely the

Committee on Fiscal Affairs subsidiary bodies:

•

Working Party 1, which generally has responsibility for treaty developments and

may be called upon to make recommendations under Pillar One regarding the

design of a new nexus rule, the effectiveness of the existing, or the need to develop

new, provisions for the elimination of double taxation and dispute resolution, ways

to effectively implement tax treaty changes, and under Pillar Two regarding switch-

over and subject to tax rules;

Working Party 2, which generally has responsibility for data collection and

economic and statistical analysis and will be consulted on the economic analysis

and impact assessment of both Pillars;

Working Party 6, which generally has responsibility for the development of transfer

pricing guidance and may be expected to make recommendations regarding the

design of a new profit allocation rule under Pillar One;

Working Party 11, which generally has responsibility for the development of co-

ordinated measures to address aggressive tax planning and may be called upon to

advance the work on Pillar Two liaising with other working parties as necessary;

The Task Force on the Digital Economy will continue to play its role in supporting

the Steering Group in its coordination role. In particular, it will facilitate any further

public consultation in relation to the proposals as required; and

Other subsidiary bodies such as the FTA MAP Forum which has responsibility for

the implementation of BEPS Action 14, as well as other bodies that deal with

country-by country related questions including the CBC Reporting Group.

•

91.

The Chairs of the relevant subsidiary bodies, working with the Secretariat, should

consider ways to streamline working methods to achieve this goal. In particular, given

existing resource constraints, it will not be possible for the Working Parties to meet

continuously to accomplish the work on the action items. Therefore, work will also need to

be done remotely between the meetings. This work could be co-ordinated through the

Bureau of the relevant Working Parties to examine particular issues. Further, Working

Parties should evaluate the use of focus groups, ad hoc committees, and other

organisational approaches that would facilitate the generation of timely work product.

92.

Additionally, the programme of work covers a broad range of issues which involve

different expertise and subsidiary bodies, and a critical aspect of this programme will be to

ensure an effective coordination of the work. Therefore, the subsidiary bodies would work

closely together as they advance their technical work, including working in different joint

session formats if necessary.

93.

Table 1 assigns responsibilities to different subsidiary bodies for each of the work

streams identified in the programme of work. The work will start immediately on all current

proposals, as well as on the economic analysis, with initially a focus on supporting the work

of the Steering Group. Once there is an agreed architecture proposed by the Steering Group

and agreed by the Inclusive Framework, the Working Parties will revert to their more

traditional role of working towards the implementation of an agreed policy direction which,

CHAPTER V – ORGANISATION OF WORK

│

given the dynamic nature of the work programme, may evolve and also require the

involvement of other working parties. A Report on the progress on work is expected in

December 2019.

Table 1. Assignment of technical work to subsidiary bodies

Working Party responsible

OVERALL

1. Support the Steering Group and organise

Public Consultation

PILLAR 1

1. Modified Residual Profit Split

Fractional apportionment

Distribution-based approaches

Business line and regional segmentation

Design scope limitations

Treatment of losses

New nexus rules

Elimination of double taxation

Dispute resolution

Working Party consulted

TFDE

WP6

WP1/WP6

WP6

WP1

WP1/WP6

WP1

WP1/FTA MAP Forum

WP6/WP10

WP1

WP6

FTA MAP Forum

WP6

FTA MAP Forum

FTA

WP1/FTA

WP6/WP11/FTA MAP Forum

10. Dispute prevention

11. Administration

12. Modifying Tax Treaties

PILLAR 2

1. Inclusion Rule

2. Switch-over rule

3. Undertaxed payment rule

4. Subject to tax rule

5. Rule co-ordination, simplification and

thresholds and compatibility with

international obligations

6. Other issues arising in connection with

Pillar 2

ECONOMIC ANALYSIS

1. Economic analysis and impact

assessment

WP11

WP1/WP11

WP11

WP1/WP11

WP11/WP1

WP11

WP1

FTA

WP2

│

CHAPTER V – ORGANISATION OF WORK

3. Next Steps

94.

In accordance with the overall approach described in this Chapter, the Working

Parties will meet in June and July and subsequently throughout the remainder of this year

to consider relevant technical issues arising in connection with the Programme of Work.

These meetings will take place under the leadership and co-ordination of the Steering

Group and will focus on those aspects of the Programme of Work that are most pertinent

to the development of a unified approach under Pillar One and the key design elements of

the GloBE proposal under Pillar Two.

95.

The Steering Group will continue to work on the development of a unified approach

under Pillar One and the key design elements of the GloBE proposal under Pillar Two so

that a recommendation on the core elements of long-term solution can be submitted to the

Inclusive Framework for agreement at the beginning of 2020.

96.

Throughout 2020 the Inclusive Framework, Steering Group and Working Parties

will work on agreeing the policy and technical details of a consensus-based, long-term

solution to the challenges of the digitalisation of the economy and will deliver a final report

by the end of 2020. Consideration will be given to the holding of public consultations as

necessary in order to obtain stakeholder feedback as the various proposals are refined.

Members of the OECD/G20 Inclusive Framework

on BEPS (IF) took a major step forward with the

agreement on the

Programme of Work to Develop

a Consensus Solution to the Tax Challenges Arising

from the Digitalisation of the Economy.

This

Programme of Work provides detailed instructions

to the IF and its technical working groups to

deliver a solution to the tax challenges brought by

digitalisation. This work focuses on two pillars. The

first pillar is about the allocation of taxing rights,

and seeks to undertake a coherent and concurrent

review of the profit allocation and nexus rules.

The second pillar focuses on the remaining BEPS

issues and seeks to develop rules that would

provide jurisdictions with a right to “tax back”

where other jurisdictions have not exercised their

primary taxing rights or the payment is otherwise

subject to low levels of effective taxation. While

exploring these two pillars, the Programme of

Work also planned an economic analysis and

impact assessment that will be carried out over

the next months. This step forward is essential as it

shows the willingness of the IF members to agree

on a global and sustainable solution by the agreed

timeline of 2020.

For more information:

[email protected]

http://oe.cd/beps

@OECDtax