On 9 October, the OECD published a Secretariat Proposal for a “Unified Approach” under Pillar One of its Programme of Work (PoW) adopted by the Inclusive Framework on BEPS earlier this year and approved by the G20 in June. The OECD proposal does not represent the consensus views of the Inclusive Framework, the Committee on Fiscal Affairs (CFA) or their subsidiary bodies.
Summary of proposals under Pillar One
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- Scope: The OECD targets large MNE groups likely to derive high profits from interactions with consumers. The approach covers highly digital business models but goes wider than that, with further work to be carried out on defining the scope and possible carve-outs. The OECD mentions that “further discussion should also take place to consider whether other sectors (e.g. financial services) should also be carved out, taking into account the tax policy rationale as well as other practicalities”.
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- New nexus: would be dependent largely on sales, and not dependent on physical presence. The OECD targets sustained and significant involvement in the economy of a market.
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- New profit allocation rule going beyond the arm’s length principle (ALP): the rule would reallocate taxing rights to market/user jurisdiction irrespective of whether MNEs have an in-country marketing or distribution presence. At the same time, the approach largely retains the current transfer pricing rules based on the ALP but complements them with formula-based solutions in areas where tensions in the current system are the highest (i.e. when residual profits exist). The OECD therefore intends to go beyond the ALP without doing away with it completely, presumably in an attempt to maintain a tenuous political equilibrium.
- Increased tax certainty delivered via a three-tier mechanism as follows:
- Amount A – a share of deemed residual profit allocated to market jurisdictions using a formulaic approach, i.e. the new taxing right;
- 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.
Pillar Two Update
- While no proposals were published for consultation yesterday, the OECD gave an update on their work on pillar two, which aims to ensure a minimum level of taxation for MNEs, independent of how they structure their business geographically. The OECD said that an income inclusion rule, a switch-over rule, a subject to tax rule and an undertaxed payments rule are currently being considered, with additional details still under development.
Next steps
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- Pillar One: The Pillar One proposals are now open to comments until 12 November. A public consultation meeting will take place at the OECD on 21-22 November.
- Pillar Two: The OECD’s Pillar Two proposals will be released in early November. A public consultation meeting will take place at the OECD in December.
Insurance Europe action
- The secretariat will share with the OECD a shortened position paper focussing on Pillar One only (Insurance Europe position on the OECD’s Programme of Work.pdf). In principle, the secretariat does not envisage an additional internal consultation process on Pillar One but members’ views are welcome in this respect.
- Because there will be a separate consultation on Pillar Two proposals, the industry would benefit from more time to form a better position, more targeted on the OECD’s concrete proposals. The secretariat, in consultation with members, will determine whether the industry should aim to submit views on Pillar Two even before the OECD comes up with its proposals. Members’ views are also welcome in this respect.