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The Inclusive Framework on BEPS Programme of Work to Develop a Consensus Solution to the Tax Challenges Arising from the Digitalisation of the Economy
By Monica Victor
In May 2019, the Inclusive Framework on BEPS released the Programme of Work to Develop a Consensus Solution to the Tax Challenges Arising from the Digitalisation of the Economy. The document is the road map for the final report on digital taxation to be delivered in 2020. However, the challenges for developing countries’ effective participation in the process demand active engagement in tax administration fora designed to gather them in the quest for solutions convening their interests and strategies.
En mai 2019, les membres du Cadre inclusif sur le BEPS ont publié un Programme de travail en vue d’aboutir à une solution consensuelle aux problèmes fiscaux posés par la numérisation de l'économie. Ce document trace la feuille de route à suivre dans le cadre de l’élaboration du rapport final sur la fiscalité de l’économie numérique qui sera présenté en 2020. Toutefois, les obstacles sont nombreux à une participation effective des pays en développement au processus, ce qui nécessite un engagement actif de leur part au sein des instances régionales sur l'administration fiscale conçues pour leur permettre d’établir des positions et stratégies communes tenant compte de leurs intérêts.
En mayo de 2019, el Marco Inclusivo sobre BEPS lanzó el Programa de Trabajo para Desarrollar una Solución de Consenso a los Desafíos Fiscales Derivados de la Digitalización de la Economía. Este documento constituye la hoja de ruta para el informe final sobre imposición digital que se presentará en 2020. Sin embargo, las dificultades a las que se enfrentan los países en desarrollo para participar de forma efectiva en el proceso exigen una colaboración activa en los foros de administración fiscal diseñados para reunir a estos países en la búsqueda de soluciones que combinen sus intereses y estrategias.
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In May 2019, the Inclusive Framework on Base Erosion and Profit Shifting (BEPS) released the Programme of Work to Develop a Consensus Solution to the Tax Challenges Arising from the Digitalisation of the Economy. [1] The Programme of Work was presented to the Group of Twenty (G20) Finance Ministers in June 2019 and established the road map to reach the 2020 consensus-based solution on a new set of international taxation rules.
Following the Policy Note Addressing the Tax Challenges of the Digitalisation of the Economy[2] that established the Two Pillars approach[3], the Programme of Work outlined the premises for the final report to be delivered in 2020. The final report will have to “include a determination of the nature of, and the interaction of both Pillars”, “reduce the number of options to be pursued under Pillar One”, “reflect the right balance between precision and administrability”, and “ensure a level playing field between all jurisdictions”.[4]
In the Chapter about the Revised Nexus and Profit Allocation Rules (Pillar One), three new taxing right proposals were mentioned: user participation, marketing intangibles, and significant economic presence. In common, the three proposals allocate more taxing rights to the market jurisdiction regardless of the physical presence of the taxpayer in the tax jurisdiction, use the total profit of a business (single unity principle), convey simplicity to reduce compliance costs and disputes, and are designed to work along with the new allocation of profits. However, the document acknowledged the need for further work to resolve technical issues related to the determination of the amount of profits subject to the new taxing right and allocation of profits rules, to the new taxing rights’ design that should capture the new concept of business presence without physical presence, and to the development of new instruments to ensure the compliance and effectiveness of the administration of the new taxing rights such as the elimination of double taxation and the resolution of tax disputes. [5]
In connection with the new taxing rights, the report described the three allocation of profits proposals: modified residual profit split (MRPS)[6], fractional apportionment method[7], and distribution-based approach[8]. One issue is common to all proposals: if total profits should be assessed using the group-wide tax basis that would consider all a multinational corporation’s entities as a single unity, or the entity or aggregated entity tax basis that treats each multinational corporation’s entity as a distinct unity. Also, the report defined three guidelines that should inform the final report on the setting of the new allocation of profits rules[9]:
- The development of conceptually underpinned methods for determining the amount of profit and loss subject to the new taxing rights;
- The use of simplification measures to reduce the burden of the new rules on tax administrations and taxpayers; and,
- A capacity and resource constraints assessment of the administrability of any proposal.
Next, the Programme of Work delineated concerns related to the implementation of the new nexus rules regarding the elimination of double taxation, the modification of tax treaty provisions, and the avoidance of tax disputes such as the identification of taxpayers and the mutual agreement procedure to settle tax disputes.
Chapter 3 of the document convened the road map for the Pillar Two Global Anti-base Erosion Proposal (GloBE). This proposal is aimed at preventing the harmful race to the bottom that could result from the adoption of uncoordinated unilateral measures to avoid tax basis erosion. The GloBE compromises two intertwined rules: an income inclusion rule, and a tax on base eroding payments. Both measures would be conditioned to an effective tax rate that is below a minimum rate. Also, the imposition of a GloBE measure would be subject to certain carve-outs, for example, the compliance with the BEPS Action 5 on harmful tax practices standards.
Finally, the Programme of Work assigned the technical work tasks to the different subsidiary bodies involved in the process of achieving a consensus solution to the tax challenges of the digitalization of the economy.[10]
The road ahead will demand intensive cooperation and technical capacity building from developing countries. More than ever, South-South tax administration fora should be active in debating and reaching agreed positions about the design of new international tax rules that address the developing countries’ challenges and promote the fair distribution of tax rights and profits among tax jurisdictions.
[3] Pillar One is the Revised Nexus and Profit Allocation Rules, and Pillar Two refers to the Global Anti-base Erosion Proposal (GloBE). For a detailed description of the Two Pillars approach see South Centre Tax Cooperation Policy Brief “Addressing Developing Countries’ Tax Challenges of the Digitalization of the Economy” (forthcoming).
[4] The Programme of Work, p. 7.
[5] The Programme of Work, p. 11.
[9] The Programme of Work, p. 12
[10] The Programme of Work, p. 39.
Author: Monica Victor is Senior Programme Officer of the Global Governance for Development Programme (GGDP) of the South Centre.
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