On 31 May 2019, the 129 members of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) released a Programme of Work to develop a consensus solution to the tax challenges arising from the digitalisation of the economy. The Programme of Work was endorsed at the G20 meeting of finance ministers in Japan on 8 and 9 June 2019. According to Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration, the goal would be to have political agreement on a unified approach by this year-end with hoped-for implementation already by the end of 2020.
The proposals included in the Programme of Work are grouped into two pillars. Pillar One focuses on the allocation of taxing rights and outlines three profit allocation proposals: Modified Residual Profit Split, Fractional Apportionment and Distribution-based Approaches. They all aim to allocate more taxing rights to the jurisdiction of the customer and/or user – i.e. the “market jurisdictions” – in situations where value is deemed to be created by a business activity through (possibly remote) participation in that jurisdiction that would not be recognised in the current framework for allocating profits. Pillar Two focuses on the remaining BEPS issues and seeks to develop rules that would provide jurisdictions with a right to “tax back” where other jurisdictions have not exercised their primary taxing rights or the payment is otherwise subject to low levels of effective taxation.
Regardless of the final outlines of a consensus approach, it is clear that it will imply fundamental changes to long-standing principles of the international tax system – including the arm’s length principle and physical nexus. The impact of such changes will be widespread across all types of companies and businesses, far beyond (highly) digitalised business models.
Our PwC tax specialists can help taxpayers navigate through this uncertainty by assessing the potential qualitative and quantitative impact of the different proposals in view of ensuring the sustainability of their broader tax and organisational model. It is recommended for taxpayers to perform such assessment rather sooner than later in order to be well-prepared by the time these changes impact their business.
For more insights and a discussion on how this may affect your business, please contact Stefaan De Baets.