The Organisation for Economic Cooperation and Development on Wednesday released a new proposal to advance the negotiation of a reformed global corporate tax system. The so-called “unified approach” contains elements of three competing models for tax reform aimed at taxing tech companies based on where their consumers are and where they generate their profits rather than where they are physically located.
The proposal, which is now open to a public consultation process, would re-allocate some profits and corresponding taxing rights to countries and jurisdictions where multinational corporations market their products and services. This would ensure that multinationals can be taxed in jurisdictions where they conduct significant business but do not have a physical presence.
The OECD aims to achieve this by creating new rules outlining where tax should be paid, by modifying the so-called nexus rules, and determining what portion of profits should be taxed under new profit allocation rules.
The proposal would reallocate a share of a company’s deemed residual profit based on its consolidated financial accounts. It would then allocate a fixed return for marketing and distribution activities. The proposal also requires a binding and effective dispute prevention and resolution mechanism.
The formulaic approach would effectively allocate only a portion of the profits of the more profitable companies to jurisdictions where their customers are based. While the plan would reallocate taxing rights to market jurisdictions, it is only expected to yield a modest rise in corporate tax revenue, according to preliminary findings of an OECD impact assessment.
Earlier this year, 134 member-countries of the OECD/G20 Inclusive Framework on BEPS agreed to negotiate a new model for international tax rules by the end of 2020.
“We’re making real progress to address the tax challenges arising from digitalisation of the economy, and to continue advancing toward a consensus-based solution to overhaul the rules-based international tax system by 2020,” said OECD Secretary-General Angel Gurría. “This plan brings together common elements of existing competing proposals, involving over 130 countries, with input from governments, business, civil society, academia and the general public. It brings us closer to our ultimate goal: ensuring all [multinational companies] pay their fair share.
“Failure to reach agreement by 2020 would greatly increase the risk that countries will act unilaterally, with negative consequences on an already fragile global economy. We must not allow that to happen.”
The Inclusive Framework’s tax work on the digitalisation of the economy is part of wider efforts to restore stability and certainty in the international tax system, address possible overlaps with existing rules and mitigate the risks of double taxation, the OECD said.
Beyond the specific elements on reallocating taxing rights, a second pillar of the work aims to resolve remaining issues related to the anti-base erosion and profit shifting (BEPS) project, by establishing a minimum corporate income tax on multinationals’ profits.
This global anti-base erosion proposal (GloBE) aims to enable countries to tax corporate income in low-tax jurisdictions if the tax rate there is lower than the as-yet-to-be-agreed minimum.
According to the OECD’s preliminary impact assessment, the second pillar of its tax reform proposal would lead to a significant increase of corporate income tax revenue globally.
This issue will be discussed in a public consultation scheduled to take place in December 2019.