OECD developing plan to radically reshape multinational firm taxation

By Julie Martin, MNE Tax

A coalition of 127 nations known as the “Inclusive Framework on BEPS” has given the OECD the green light to further develop four proposals that would dramatically alter the international tax rules applicable to multinational corporations, a policy note released by the OECD today reveals. 

Among the proposals under review is a plan for the worldwide adoption of a minimum tax, favored by Germany and France, and for rules that would grant greater taxing rights and a larger share of MNE profits to market jurisdictions, possibly through the use of non-arm’s length methods. 

The OECD has been working to achieve consensus among nations on how to update the international tax rules to more appropriately tax multinationals that operate newer, digitalized, businesses since the July 2013 publication of the OECD/G20 base erosion profit shifting (BEPS) plan. 

The current plan is to work toward reaching consensus among Inclusive Framework member countries by the end of 2020. As the work has progressed, proposals that would affect all types of multinationals have gained traction and are now being considered along with changes that would focus only on digitalized businesses.

Four proposals, two pillars

The policy note released today by the OECD identifies four proposals that the Framework countries agree should be explored in depth. The four proposals are categorized into two “pillars.”

The goal is to reach consensus on either one or both pillars, explained Pascal Saint Amans, Director of the Centre for Tax Policy and Administration at the OECD, who spoke during an OECD webcast.

One of the three pilar-one proposals would grant greater taxing and income allocation rights to countries where an MNE’s active user base is located, Saint Amans said.

This proposal, applicable only to highly digitalized businesses like advertising and platforms, recognizes that value is created when data is provided by users to the MNE, he explained.

Another proposal would take marketing intangibles into account for nexus and income allocation purposes.

This proposal, which is applicable to all types of MNEs, acknowledges that companies create value and profits through marketing and that those marketing intangibles belong to the market jurisdiction, Saint Amans said.

A third approach would grant taxing rights to market jurisdictions based on the concept of significant digital presence.

This approach is favored by India, Colombia, and other countries, Saint Amans said, because it is simpler to administer than rules based on marketing intangibles and thus can be implemented more easily by developing countries.

Profit allocation

With respect to pillar one, the policy note states:

“Some of the proposals would require reconsidering the current transfer pricing rules as they relate to non-routine returns, and other proposals would entail modifications potentially going beyond non-routine returns. In all cases, these proposals would lead to solutions that go beyond the arm’s length principle.”

“On the residual profit, on the big chunk of profit . . . the three proposals will explore new methods which may go beyond the arm’s length principle,” Saint Amans said.

Achim Pross, Head of International Co-operation and Tax Administration at the OECD added that the OECD is investigating a form of a residual profit split, among other approaches, for both the user participation and market intangibles proposals.

“[A]s the marketing intangibles name suggests, it would require splitting the residual also between elements, such as R&D and marketing, and then only the marketing portion of the non-routine part would be allocated to the market jurisdiction,” Pross explained.

Minimum tax

The policy note’s second pillar takes a different approach, addressing the low effective tax rates paid by highly digitalized businesses through tackling profit shifting opportunities not addressed by the BEPS project.

This pillar calls for income inclusion rules patterned after the new US GILTI (global intangible low-taxed income) rules which would provide residence and source countries with the right to tax profits that are subject to low taxation, Saint Amans said.

The proposal also calls for new tax rules that would deny a deduction for outbound base eroding payments going to low tax jurisdictions, like the US’s BEAT (base anti-abuse tax).

Coordination rules would mitigate double taxation, Saint Amans said.

Next steps

The OECD inteds to develop the proposals so that each can be more thoroughly considered by countries.

The OECD will release a public consultation document on February 11 or 12 soliciting written comments from stakeholders, Saint Amans said.

This will be followed by a public meeting in Paris the second week of March.

Saint Amans said the OECD’s ultimate goal is not to just provide a discussion document for agreement by Inclusive Framework members. Rather, he said, the OECD aims to provide by 2020 a complete solution that can be used by governments to start changing their tax rules.