Background
Governments around the world are concerned that multinationals have exploited loopholes to park profits in low tax locations. In 2015, the OECD initiated a campaign addressing base erosion and profit shifting (BEPS). This was meant to end abuse of existing tax rules. Now the OECD wants to change the tax rules altogether, especially in the digital area. There is no international consensus, so the OECD is inching along with its proposals and hopes to conclude something by 2020.
New OECD digital taxability proposals
Until now, a company from country A was taxable in country B if it does business in country B. The OECD proposes three new taxability and profit allocation bases:
• Based on user participation in a country
• Based on marketing intangibles in a country
• If there is a “significant economic presence” in a country
Taxation based on user participation is aimed at “certain highly digitalized businesses” where such enables advertising revenues to be generated, irrespective of whether those businesses have a local physical presence. So-called “non-routine” profits would be allocated between countries based on the activities of users.
Taxation based on marketing intangibles may reflect, for example, trademarks, trade names, customer lists, customer relationships, proprietary marketing and customer data. It has broader application than taxation based on user participation, and is not weakened by modest decision-making in low-tax jurisdictions. But it reflects “state of mind” of customers, not demand. “Non-routine” income would be allocated based on marketing intangibles contribution or a functional analysis – but approximations may be necessary.
The “significant economic presence” approach (favored in Israel) allocates income to a country if there are revenues and at least one other factor, e.g., users, volume of digital content, local billing or currency, local language website, local final delivery or after-sales support, or sustained marketing.
Global anti-base erosion proposals
Anti-base erosion means preventing the shifting offshore of profits. The OECD proposes two alternatives:
• Tax in the home country of a company if the profits of a foreign branch or affiliated company are not taxed at a minimum tax rate. This would reflect US GILTI (global intangible low taxed income) principles, and/or
• Tax in the payment country on “undertaxed payments” not taxed at a minimum tax rate elsewhere.
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