Technological advancements continue to change the way societies, governments and economies operate globally. As a result of the rapidly-growing global economy, the Ogranisation for Economic Co-operation and Development (OECD) issued a discussion draft on proposals to address the taxation of the global, digital economy.
Current rules on right-to-tax and international profit allocation have been in place for nearly a century, and while necessary, making changes to these rules can be challenging to accomplish with global consensus. AICPA recently responded to this discussion draft with a comment letter detailing specific recommendations to address the tax challenges of a digital, global economy.
The current international taxation model allows only companies with a local physical presence – or a permanent establishment (PE) – to be subject to income tax in a foreign jurisdiction. The growth of the digital economy has allowed companies to sell products globally without establishing a physical presence and therefore, avoiding local taxation. In June, the OECD presented a work plan to the G-20 finance officials outlining a process for establishing new global tax rules addressing the rapid digitalization of the economy. These officials reaffirmed the importance of a worldwide implementation of the OECD action plan and committed to work towards a global, consensus-based solution.
The OECD’s discussion draft consists of two parallel pillars; the first pillar contains three alternative proposals to change how the international tax community would tax profits in a country – the so=-called “nexus” rules - and the second pillar would impose a worldwide minimum tax in most countries, with possibly with features similar to those the U.S. enacted under the Tax Cuts and Jobs Act (TCJA) with provisions relating to GILTI and the base-erosion and anti-abuse tax (BEAT).
The AICPA’s recommendations state that “a consensus-based, equitable and successfully durable rebalancing of multi-jurisdictional taxing rights must have four elements:”
- Any rules extending taxation nexus to businesses that lack a physical presence in a jurisdiction should be clear, measurable, predictable and applied consistently and neutrally across all industries and business models, and across all jurisdictions;
- The arm’s-length standard, which is based on economic reality, is flexible enough to accommodate many of the concerns raised and provides a basis for addressing these concerns. Exceptions should consist solely of rules that are specific and limited in scope for attributing profits and losses to a jurisdiction. It is vital that any such rules are clear and administrable in their application and give proper regard to all value creating activities and business investment that takes place in other jurisdictions;
- All participant “Inclusive Framework” jurisdictions (participating countries) must agree:
- to adopt and fully implement the new consensus to ensure that all income is properly taxed only once across all applicable jurisdictions, and
- to immediately repeal any previous unilateral actions, including temporarily enacted provisions related to digital services, whether currently in effect or pending; and
- All participant Inclusive Framework jurisdictions must include compulsory effective and practical mechanisms in their treaties and other bilateral agreements to resolve any controversy over taxing rights, such as mandatory binding arbitration, as a minimum standard subject to peer review to ensure prompt resolution of any situations potentially resulting in double taxation.
AICPA would like to see the OECD process lead to a global consensus resulting in the withdrawal of unilateral actions. We will continue to review, evaluate and discuss the OECD’S workplan and expect to submit comments on both pillars in the Fall of 2019.