OECD proposals set to radically change international tax framework

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The OECD has recently issued two consultation documents seeking comments on its proposals for tackling the tax challenges arising from the digital economy. The first of these proposals (“Pillar One”), published on 9 October 2019, sets out the OECD’s plans for reallocating the right to tax the profits of multinational enterprises (“MNEs”) among governments based on new nexus rules. The Pillar One consultation document provides a high level summary of what it terms a “Unified Approach”, consolidating various earlier proposals. The second proposal (“Pillar Two”), published on 8 November 2019, invites comments on the OECD’s proposal to introduce globally a minimum profit tax rule potentially requiring the payment of top-up profit taxes.

Adopting an international consensus for taxing the digitalised economy has become critical to prevent the same MNE profits becoming subject to multiple national taxes, which is a very clear and present danger arising from the operation of an increasing number of national digital services taxes. Notably both France (as reported here) and the United Kingdom (as noted in the policy paper produced by the UK Government under the “Policy Objective” heading) have agreed to review, make adjustments or even disapply their national digital services tax should such an international consensus be reached.

Pillar One


It is proposed that the Unified Approach should apply not only to highly digitalised business models, but also businesses that generate revenue from supplying consumer products or digital services that have a consumer-facing element. Streaming services, social media platforms, online marketplaces and other similar businesses are therefore likely to be caught. With the precise scope still under review, the OECD is yet to firmly carve out some sectors. The financial services and extractive sectors have been mentioned as potentially out of scope. Businesses will need to monitor further developments and consider whether their business operations may be caught by the new nexus rule.

Unified Approach: Summary

The OECD is proposing to provide market (user) countries with a new taxing right in respect of residual (or non-routine) profits of MNEs. The new nexus will be based on the location of MNEs’ sales and consumers, rather than the tax residence, physical place of establishment or the location of a dependent agent of an MNE. In addition, to provide more certainty, the consultation document proposes a rebuttable simplified fixed remuneration for baseline marketing and distributions activities physically present in a country.

The OECD has proposed a three-tier mechanism to implement the Unified Approach. Amount A focuses on calculating then allocating deemed non-routine profits of MNEs among market jurisdictions for taxation in those jurisdictions. Amounts B and C concern the taxation of marketing and distribution functions of MNEs, dealing with the taxation of “baseline activity” and the taxation of amounts above this baseline, respectively. This is set out in more detail below.

Unified Approach: Amount A

Amount A – Amount A is proposed to reallocate, for local profit taxation, certain group level profits of MNEs to the jurisdiction(s) from whose market that profit is generated, irrespective of whether or not an MNE has a physical presence there. Generally, this new taxing right will be awarded to the location of the user or marketplace. The taxable profit to be so reallocated will be calculated by reviewing the total profits made from a certain business line, region or market country, considering what a deemed “routine profit” for the business line would be and subtracting this designated “routine profit” from total profits. The remainder (the “residual profit”) would be subject to the market jurisdictions’ new taxing right, unless it is attributable to other factors such as trade intangibles. Under the Unified Approach, businesses would need to review the profits made in all jurisdictions in which they operate to determine whether profits are “routine” and if not, work out how much of that profit is likely to form Amount A.

Unified Approach: Amount B

Amount B – The Unified Approach is proposing to determine the taxable profits attributable to routine marketing and distribution activities of an MNE using a fixed return or percentage, with these profits continuing to be taxed in the jurisdiction where the relevant activities are carried out. The OECD’s stated intention in going beyond current transfer pricing rules in this way is to reduce tensions and disputes relating to the pricing of distribution and marketing activities. While it is unclear whether the use of fixed returns will indeed reduce the number of disputes, businesses will certainly need to prepare for additional compliance burden and less flexibility in determining the pricing of, and taxation that can be levied on profits from, marketing and distribution activities.

Unified Approach: Amount C

Amount C – Where the baseline profit established under Amount B is less than the profit actually produced by the marketing and distribution activities, the proposed Unified Approach would tax any additional profit as Amount C.

Pillar Two

The OECD’s objective under Pillar Two is to introduce globally a minimum level of tax on profits of MNEs through a cohesive set of rules. The consultation document describes this “Global Anti-Base Erosion Proposal” (also known as “GLoBE”) as a top-up to an agreed fixed rate of profit tax.

The OECD’s GLoBE work appears to be only at an early stage, but the current proposal is to use profit figures from MNEs’ financial accounts with minimal adjustments (such as the exclusion of pidend income) to determine whether sufficient profit tax has been paid by the MNE in question. The levying of a top-up tax on MNE profits is proposed where the amount of actually paid profit tax relative to the accounting profits is less than the “minimum level” of profit tax. Although no indication has been given by the OECD as to what the minimum rate of tax will be, examples in the OECD consultation document use a minimum tax rate of 15%.

The OECD has not confirmed whether the measuring of the effectively paid profit tax against the expected minimum profit tax would be applied on a global (i.e. per MNE basis), per country or per entity basis. The OECD is also exploring whether taxpayers can mix low-tax and high-tax income within the same entity or across different entities within the same group in a process known as “blending.”

The top-up taxation is proposed to be achieved through a combination of withholding taxes, controlled foreign company-type taxes, disallowing deductions for expenses and rules that allow or oblige switching to the credit method from the exemption method for double taxation relief.

The deadline for comments on this proposal is 2 December 2019.


The OECD has made considerable progress towards a comprehensive international consensus by proposing the Unified Approach but the proposals under Pillar Two are not as developed. However, at this stage the OECD’s proposals do not address concerns relating to the practicalities of allocating, calculating and collecting any additional tax. Many MNEs may not currently identify profit by market jurisdiction, region, or business line in the way for Amount A under Pillar One, nor rigidly define and separate their baseline marketing and distribution activities as envisaged under Amounts B and C. Further, clarification is still needed on how businesses will be required to calculate “routine-profit” and determine fixed remuneration for baseline marketing and distribution activities. In the Pillar Two proposals, the OECD has not yet confirmed which countries will be granted rights to the top-up tax and how collection is intended. It has also not been confirmed how the OECD will deal with policy conflicts where certain countries may elect to tax businesses in a way that may not be compliant with the OECD’s current proposals.

The taxes proposed by both Pillar One and Pillar Two are intended to form an additional layer over pre-existing profit taxation. Presumably implementation would be through a multi-lateral instrument similar to the MLI implementing the treaty-based BEPS proposals. A two-tier system of profit taxation is likely to give rise to complexities and challenges, and businesses would be wise to consider how they might best prepare for the changes proposed by the OECD, including preparing for the increased compliance burden and reporting requirements.

Article co-authored by Hannah Jones.