OECD moves forward with global tax reform

Following a rocky period during the consultation, the OECD is confident that its plans for a global digital tax are back on track.

Last month, the 137 countries participating in the talks agreed to “affirm their commitment to reach an agreement on a consensus-based solution by the end of 2020”.

Since May 2019, the OECD has been working on a two-pillar approach to international tax reform. Pillar One seeks to ensure that multinationals conducting sustained and significant business in places where they do not have a physical presence can be taxed in these jurisdictions. This is a significant departure from the long-established practice of only taxing companies on their profits based on the locations in which they have a physical presence. In the digital age, this has enabled companies, tech giants in particular, to make money in places where they have no physical presence and, more significantly, are free from any tax burden.

Pillar Two aims to standardise the varying tax structures and is seeking rules that would provide jurisdictions with the right to ‘tax back’ where other jurisdictions have not exercised their primary rights, or the payment is otherwise subject to low levels of effective taxation.

The OECD members are aiming to implement a system that goes beyond the arm’s length principle – i.e. both parties are on an equal footing – and a system that would be simple and stable with increased tax certainty.

The proposed approach will broadly align corporate tax payment with the value of sales in each market, allowing tax authorities to collect a proportionate amount of corporate tax for activities taking place in their jurisdictions. One of the key features of the proposed approach is that tax authorities will be given a new ‘taxing right’ which will allow them to assert the right to collect corporate income tax over organisations that do not have any physical or legal presence in a market. 

The proposed unified approach under Pillar One is good news. The loss of tax income from a number of large OECD members, including the UK, is significant, unfair and has pushed the burden of tax payments onto other forms of corporate and non-corporate taxation.

Technical work on Pillars One and Two will continue throughout 2020, with detailed practical measures developed to provide clarity and avoid uncertainty and conflict. Members of the Inclusive Framework, who released the statement last month, will meet in Berlin in July to see if a consensus can be reached on Pillar Two. If this is achieved, it will bring about changes to legislation and tax treaties across the globe. It will also represent a significant move towards global tax fairness.