The OECD’s plans to overhaul international tax rules would “significantly increase” global tax collections, particularly from digital companies, officials from the organization said.
The proposed changes to the rules that determine where and how much tax multinationals pay will have the biggest impact on digital companies and ones with valuable intangibles, such as patents and trademarks. The rules would reduce incentives for companies to shift profits for tax reasons, according to the Organization for Economic Cooperation and Development.
The Oct. 9 report doesn’t represent consensus among countries. Instead, it’s a proposal from the OECD itself to try to spur discussion among countries, said Pascal Saint-Amans, director of the OECD Center for Tax Policy and Administration during a webcast Oct. 9.
“The right solution will be one that countries can agree on,” Saint-Amans said. “What we tried to do was provide elements which could serve these different conflicting interests in a way where countries could agree.”
The OECD proposal is the first time the organization has put forward a unified plan for tackling digital corporate tax problems. It would allocate more corporate profits to countries where multinationals have a large market presence but little or no taxable presence under current rules. It’s also working on rules that would set a global minimum tax, and will publish updates on that work in November.
The proposal aims to tackle concerns that global tax rules don’t capture the value consumers create for multinationals, particularly digital companies, resulting in little or no tax being paid in some countries. Some countries with big consumer bases, like India, could see more tax revenue under the OECD’s plan while others would see less. Companies could also end up with a bigger tax bill if their profits are reallocated to higher-tax jurisdictions.
If countries don’t agree to the OECD’s global plan, some jurisdictions including France and the U.K. will unilaterally tax tech companies’ revenues, provoking trade sanctions from the U.S. which could further destabilize the global economy.
The report combines ideas proposed by countries earlier in the process, and must ultimately find consensus among more than 130 countries.
The plan is a departure from current rules, which give taxing rights to the jurisdiction where a company keeps its intellectual property and performs key functions.
The new rules would apply to multinationals that meet two conditions: They interact with consumers—retail companies, for example, as well as many digital platforms—and make above-normal profits. The companies would see a percentage of their income taxed in market jurisdictions, where their consumers are located.
At this point in the project, the OECD hasn’t defined the threshold of profitability above which companies would be affected.
The new rules seek to differentiate “consumer-facing businesses"—which either sell to consumers or provide services with a “consumer-facing element,” like many digital platforms—from purely business-to-business companies.
That leaves out business-to-business industries like commodities and extraction, but it would capture digital business models like social media platforms or search engines that sell ads ultimately seen by users.
The OECD hasn’t decided how the financial services industry would be treated, Saint-Amans said in an Oct. 4 call.
The work has taken on added urgency as countries move ahead on unilateral measures while waiting for a global solution from the OECD. France passed a law in July imposing a 3% tax on the revenue tech giants like Google and Amazon.com Inc. make from selling online advertising, sale of user data, and business on marketplace platforms. Austria’s legislature is in the process of approving a 5% digital advertising tax, and the U.K. plans to implement a 2% tax on digital services next year.
“We think the scope, which is broader than but starts with and covers digital, is probably relevant to cover what needs to be covered and prevent countries from moving to unilateral measures when they’re frustrated with existing rules,” Saint-Amans said.
Only multinationals’ above-normal profits would be reallocated to markets, while their routine returns would continue to be subject to transfer pricing rules. Transfer pricing determines the value of intercompany transfers, which determines how much taxable profit a company has in a jurisdiction.
A second piece of the organization’s digital tax work, which would introduce global minimum tax rules, will be dealt with in another report in November, the document said.
The proposal calls for new rules on nexus, the threshold that determines whether a company is taxable in a jurisdiction.
Current rules are based on physical presence, but there is “recognition and agreement” that the definition doesn’t sufficiently cover business models that operate remotely, Saint-Amans said.
Under the new rules, companies that meet a sales threshold in a country could be taxed there, even if they don’t have a physical presence.
The proposed change wouldn’t override existing definitions of permanent establishment, Saint-Amans said.
The proposal details a multi-step approach to help companies and tax authorities understand how to allocate profits, with the aim of increasing tax certainty.
To determine how much of a company’s in-scope profit to reallocate, OECD proposes to first use financial reporting to determine a company’s profitability, and then determine how much of that profit is above-routine, or residual, by applying a yet-to-be-determined threshold. A percentage of that non-routine return would then be reallocated to—and thus taxed by—the market countries instead of the residence country.
A second “tier” deals with a company’s activities in market jurisdictions that are already taxable under existing rules, like distribution functions. The proposal suggests creating fixed levels of return for those activities to make its transfer pricing simpler for tax authorities and reduce the risk of disputes between companies and authorities.
The third tier of the plan calls for countries to agree to effective dispute resolution in exchange for gaining revenue. India, among others, has balked at binding arbitration in the past.
“We can’t go forward without improving tax certainty,” Saint-Amans said.
But including some guarantee of tax certainty in the plan—such as what dispute resolution mechanisms provide—will be key to getting the buy-in of countries that may stand to lose revenue. Dispute resolution could also allay the concerns of companies that worry new rules would lead to double taxation if tax authorities don’t agree on how much tax a company owes to each.
“I have a pretty good degree of confidence that this is not taboo, as long as we don’t try to impose a one-size-fits-all solution, arbitration,” he said. “What matters is an outcome that ensures the elimination of double taxation in a short timeline.”