OECD Announces Major Progress on Global Tax Framework for Digital Services
The global effort to establish a comprehensive framework for taxing digital services took a significant step forward this week, as the Organization for Economic Co-operation and Development (OECD) announced a year-long extension for countries with digital services taxes.
The decision was reached during the 15th meeting of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting, where 138 member nations endorsed an Outcome Statement highlighting the progress in implementing a two-pillar approach to international tax reform.
Pillar One, the centerpiece of this approach, consists of two components, Amount A and Amount B. The former allocates taxing authority to market jurisdictions where multinational enterprises generate profit without a physical presence, aiming to eliminate double taxation and compliance challenges. Additionally, it seeks to address countries’ inclinations to impose their own digital services taxes while promoting stability in the global tax landscape.
What does this mean for businesses?
The OECD’s announcement is a positive development for businesses that operate in the digital economy. By delaying the implementation of digital services taxes, the OECD has given businesses more time to prepare for the new rules and ensure that they are compliant. The announcement also clarifies the specific criteria that will be used to determine which businesses are subject to the new regulations. This will help businesses understand their tax obligations and make informed decisions about their future operations.
For example, the MLC specifies that multinational enterprises with revenues exceeding EUR 20 billion and profitability above 10% will be subject to Amount A. This means these businesses will have to pay taxes on a portion of their profits in market jurisdictions where they generate significant user activity, even if they do not have a physical presence in those jurisdictions. The announcement also provides some guidance on how Amount A will be calculated. Under the MLC, 25% of profits exceeding 10% of revenues will be allocated to market jurisdictions. However, the threshold for profitability will be reduced to EUR 10 billion after seven years, contingent on the successful implementation of Amount A.
The OECD is now working to finalize the framework for Pillar One’s Amount B. This is a complex process, but the OECD is committed to completing it by the end of the year. Once the framework is finalized, countries will need to adopt it into their domestic tax laws. This process will take some time, but it is expected to be completed by 2024.
The OECD’s announcement on Pillar One is a significant step forward in the global effort to reform international taxation. It gives businesses more time to prepare for the new rules and ensures the reform process is fair and transparent.
What are the challenges ahead?
While the OECD’s announcement is a positive development, there are still some challenges ahead. One challenge is that the MLC is a complex document, and it will take time for businesses to understand and comply with its provisions. Another challenge is that some countries have already implemented their own digital services taxes. These countries may be reluctant to abandon their taxes in favor of the OECD’s framework.
Despite these challenges, the OECD’s announcement on Pillar One indicates that the international community is committed to reforming international taxation. The two-pillar approach is a complex and ambitious reform, but it can potentially address the challenges posed by the digital economy.
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John Bodur, MBA is a Senior Tax Consultant in the firm’s Global Business Services practice and is responsible for assisting clients and adding depth in all areas of the firm’s international tax consulting services including transfer pricing, and the firm’s compliance expertise.