What is the G20/OECD work on Tax and Digitalisation?
The digitalisation of the economy has brought significant benefits to all of us. Nonetheless, recent Organisation for Economic Co-operation and Development (OECD) reports on the taxation of the digital economy highlight how digitalisation has also posed challenges to the international corporate tax system; in particular, because many companies may have a substantial economic presence in a jurisdiction without being taxable there.
As a result, the G20/OECD Inclusive Framework is reviewing the rules of the international corporate income tax system.
If the Inclusive Framework does not reach consensus on a multilateral solution, a number of countries will move unilaterally with measures outside of the reach of double tax treaties and further distortions, uncertainty, and complexity could be created.
What is the impact for businesses?
Commercial
- The worldwide effects on the effective tax rate (ETR)
- The group structure
- The compliance burden
- Deals: the changes may have an effect on the cost of capital
Tax policy, communications and stakeholder management
- Given the innovative solutions being considered by the OECD, the C-suite will need to be briefed, possibly together with investors.
- In addition, with the current attention of the general public to tax matters, as soon as the OECD announces a technical plan and/or an agreement, there will be significant media coverage. At this point, the tax department may be asked to brief the rest of the group management.
- We can help clients in briefing their internal stakeholders in advance of any media coverage and flag potential risks and steps that need to be taken.
What are proposed changes?
The OECD proposed changes focus around two main pillars:
• Pillar I: More income will be taxed in the markets, i.e., where the customers are.
– Rules will add formulas for high profit entities and for routine marketing and distribution functions to traditional Transfer Pricing
• Pillar II: A Multinational group will be subject to a global minimum effective tax rate.
– Pillar II comprises an Income Inclusion Rule and a Denial of Deduction Rule
Unilateral actions: Under various enacted/ proposed unilateral DSTs, highly digitalised companies are taxed nn their turnover at a rate of between 2% (UK) and 7.5% (Turkey), and not on their profit.
Myth busters
Myth: The OECD work on the digital economy will only impact tech companies
Reality: The changes proposed by the OECD are likely to affect most companies, including those with a more traditional business model.
Myth: The project is difficult and therefore it will proceed slowly
Reality: The major rules of the project will probably be agreed by mid/end 2020 with implementation starting the following year.
Myth: The project is difficult and therefore there will be no agreement in the end
Reality: The environment remains very volatile but the project has strong political support and, thus, good chances of success.
How can PwC help?
The changes proposed by the OECD on international tax rules will impact many large international businesses.
We can:
- Use professional insight to explain exactly what the OECD changes mean.
- Assist with interaction with internal stakeholders (e.g. the C-suite).
- Deliver an impact assessment.
Tool 1: Theoretical Firm
Tool 2: CbCR-based modelling
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