Scope

The scope of the new rules will cover highly digital business models but also goes further, focusing on consumer-facing businesses. More work will be done on scope and possible exclusions or carve-outs. Size limitations, such as the EUR 750 million revenue threshold used for country-by-country reporting requirements, will be considered. The document sets out that extractive industries are assumed to be out of scope.

New nexus approach

The new rules will create a nexus for in-scope businesses that is not dependent on physical presence, but instead on sustained and significant involvement in the economy of a market, largely based on sales. It is possible that the new nexus could have thresholds, including country-specific sales thresholds calibrated to ensure countries with smaller economies are included. This measure would be designed as a new self-standing treaty provision (in addition to the existing permanent establishment and business profits articles).

New profit allocation rules

The new profit allocation rules shall be applicable to taxpayers within the scope, irrespective of whether they have in-country marketing or distribution present (permanent establishment or separate subsidiary) or sell via unrelated distributors. The new approach shall increase tax certainty for taxpayers and tax administration and shall be based on Three Tier Allocation Mechanisms, i.e.:

• Amount A – a share of deemed residual profit allocated to market jurisdiction using a formulaic approach;
• Amount B – a fixed remuneration for baseline marketing and distribution functions that take place in the market jurisdiction, and
• Amount C – binding and effective dispute prevention and resolution mechanisms relating to all elements of the proposal, including any additional profit where in-country functions exceed the baseline activity compensated under Amount B.

Next steps

Comments to the consultation documents were welcomed until 12 November 2019. The public consultation will be held on 21 and 22 November 2019 in Paris. The OECD continues its work in respect of the global anti-base erosion proposal (Pillar Two) of the program of work. A consultation document is expected to be released also in November 2019, followed by a separate public consultation meeting in Paris in December 2019. The OECD hopes that political agreement on the architecture of both the new nexus and profit allocation rules and the global anti-base erosion rule can be reached by June 2020.

Individual national efforts for the taxation of digital services

Irrespective of the OECD’s ambitious goal to introduce the world-wide rules for the taxation of digital services, many states continue with the introduction or implementation of their national rules. In the recent days, some progress in the implementation process has been achieved in France. The French tax authorities published guidelines for consultation clarifying aspects of the digital services tax on 16 October 2019. Comments are requested by 29 November 2019. The guidelines clarify reporting and accounting obligations, recovery, control and litigation and a tax consolidation system within a group of companies. In addition, Russia considers new ways to tax digital companies according to recently released budget guidelines for 2020-2022. Foreign entities providing electronic services in Russia are already required to register with Russian tax authorities and collect and remit VAT on those services. The Russian government considered draft legislation on the issue as early as 2016, when the MOF reportedly said that the legislation was meant to implement action 1 of the OECD’s base erosion and profit-shifting project. The budget document especially calls for the “creation of a system of legal regulation of the digital economy, including the creation of a legislative framework for the formation of a single digital environment” in order to introduce more digital technology to the economy. Other countries which are currently seeking the introduction of rules for the taxation of digital economy are Malaysia and Indonesia.