by Julie Martin, MNE Tax
A US-backed proposal for globally coordinated rules allowing market countries to tax a greater share of multinational firm profits based on a “marketing intangibles” approach should be limited to businesses that ultimately sell to consumers, a US Treasury official said February 14.
A coalition of 127 countries known as the “Inclusive Framework on BEPS” is examining three proposals to revise the international profit allocation and nexus rules in a coordinated way to respond to new tax challenges posed by digitalization. The proposals were described an OECD consultation document issued February 13 along with a proposal for a global minimum tax.
Speaking in Washington at a Tax Council Policy Institute conference, Chip Harter, Deputy Assistant Secretary (International Tax Affairs) at the US Department of the Treasury again said that if consensus among nations can, in fact, be reached to change the international tax rules in a coordinated way, any additional taxing rights granted to market countries would be “relatively modest” and likely based on the US-favored “marketing intangibles” approach. He predicted that countries would agree to a simple formula allocating more income to market jurisdictions that would allow tax administrations from less developed countries to easily apply the rules.
Harter further again assured that countries would not agree to full formulary apportionment or a tax only on highly digitalized business models, as proposed in the OECD consultation document. The “significant digital presence” permanent establishment proposal and call for full unitary apportionment were advanced at the last minute by a group of 24 developing countries, he said.
Marketing intangibles proposal
In a separate panel, Brian Jenn, Deputy International Tax Counsel at the US Department of the Treasury, said that although in theory, any business could have marketing intangibles, it is probably best as a policy matter to limit this rule only to certain businesses.
“I think it could make sense to focus this proposal on businesses that ultimately, directly or indirectly, are dealing with individual consumers rather than with other businesses just because I think marketing intangibles are most relevant in that context,” Jenn said.
Jenn said the greatest political pressure causing countries to seek a change to the international tax system comes from the popular perception that companies with high-profile brands are not paying their fair share of taxes to local jurisdictions. Thus, the focus of any changes to the international tax rules should be on visible brands that drive customers to that product or service, he said.
Jenn said that is possible to “bridge the gap” between the user participation proposal, favored by the UK, and the marketing intangible proposal, favored by the US.
There is a distinction between highly digitalized businesses models — such as the types of businesses that prompted calls for a digital services tax — and other business models, he said.
“I think you might treat the highly digitalized business models that have businesses as their customers but are advertising or providing services to individual users differently . . . .You could think about the marketing intangible being the value of having the users or the value of the positive associations of the users with the business,” Jenn said. This would contrast with the “normal case,” Jenn said, where the marketing intangible would be with respect to individual consumers.
Asked what would qualify as a marketing intangible, Jenn said that the items listed in the OECD discussion draft, such a brand names and customer relationships were illustrative only. Something like goodwill could also be covered, he said. He added, though, that it ultimately may not matter because is likely that that amount allocated to market jurisdictions under a marketing intangibles theory would be based on a simple formulaic approach.
The public has just over two weeks left to respond to the OECD consultation document; comments are due March 6.
Julie Martin
Julie Martin is the founder of MNE Tax. She edits the publication and regularly contributes articles on new developments in cross-border business taxation.
Julie has worked as a tax journalist and editor for more than 13 years. Prior to that, she worked as an in-house tax attorney in New York. She also holds an LLM in taxation from New York University School of Law.
Julie can be reached at [email protected].
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