OECD proposal on digital tax leaves many questions unanswered

At the OECD, intense work is underway in trying to come up with a set of rules that could achieve international consensus on how to deal with the tax challenges of the digitalization of the economy. On 9 October the organization presented its proposal for pillar 1 – revised nexus and allocation rules – of its two-pillar digital tax project. The objective is to narrow down the three competing alternatives, presented earlier this year, to one unified approach to be presented at the G20 meeting in January 2020.

The proposal focuses on consumer-facing businesses and, in addition to the normal transfer pricing rules, relies on formulary apportionment methods to allocate profit to market jurisdictions. It creates a new three tier profit allocation mechanism that goes beyond the arms-length principle and is based on fixed percentages. Such a system is destined to be extremely complicated from a compliance, administrative and dispute perspective.

The consultation draft only describes the general features of the new system, leaving most of the details to be hammered out between the 134 (inclusive framework) countries involved on this project. This will include how to treat losses, providing a clear distinction between routine and non-routine profits, establishing efficient dispute resolution mechanisms etc. etc.

The OECD path regarding taxation of the economy in a digitalized world has clearly shifted since its start as part of the BEPS project. It is no longer about base erosion profit shifting but rather about redistribution of tax bases and tax revenues among countries. To put it more explicitly, it all seems to be about providing market jurisdictions (consumption countries) with a bigger piece of the tax pie. If some countries shall have a bigger slice, others will have to settle for a smaller one. Any corporate tax system based on sales will have negative consequences for small open exporting countries like the Nordics. The Confederation of Swedish Enterprise has earlier this year commented on this. The Swedish governments has so far done a good job in defending Swedish interests but is, without a doubt, in for tough negotiations next year in trying to find a balanced solution.