OECD seeks public input on proposals addressing tax challenges of digital economy

The OECD today invited the public to provide input on proposals to modify the existing international tax rules in a coordinated way to more appropriately tax multinational digital firms.

Comments on an OECD consultation document are requested by March 1; a public consultation will be held in Paris on March 13–14.

The consultation document follows a January 9 policy note issued by the “Inclusive Framework on BEPS,” now comprised of 127 countries.

The January policy note expressed the Framework’s agreement to explore two tax policy “pillars.” The consultation document released today does not use the term “pillar” but discusses the same proposals in greater detail.

The consultation document identifies three proposals under consideration by nations that would revise the profit allocation and nexus rules so that more value created by an MNE’s activity or participation in a user or market jurisdiction would be allocated to that jurisdiction. A fourth proposal offers new ‘global anti-base erosion’ rules.

Two of the three profit allocation proposals — ones based on the concepts of “user participation” and “marketing intangibles” — use a mechanism that would reallocate a proportion of an MNE’s non-routine profit from the entities that are currently realizing that profit to another jurisdiction.

The user participation proposal – applicable only to social media, search, and platforms — would allocate more income to the jurisdiction in which users are located; the marketing intangible proposal would allocate more to where the marketing intangible exists.

A third approach woud apply where a non-resident enterprise has a significant economic presence in a jurisdition on the basis of factors that evidence a purposeful and sustained interaction with the jurisdiction via digital technology and other automated means. In such case, MNE profits would then allocated based on a fractional apportionment method or another more simplified method.

The fourth proposal, formerly pillar 2, calls for new global anti-base erosion rules aimed at addressing the continued risk of profit shifting to entities subject to no or very low taxation.

This proposal calls for the development of rules that would tax the income of a foreign branch or a controlled entity if that income was subject to a low effective tax rate in the jurisdiction of establishment or residence, similar to the new US GILTI rules. These rules would be augmented by a new tax on base eroding payments, similar to the US BEAT.