The Secretariat’s proposal is designed to address the tax challenges of the digitalisation of the economy and to grant new taxing rights to the countries where users of highly digitalised business models are located. The proposed “Unified Approach” would retain the current rules based on the arm’s length principle in cases where they are widely regarded as working as intended, but would introduce formula-based solutions in situations where tensions have increased – notably because of the digitalisation of the economy. Essentially, the proposal aims to achieve the following:
- Scope: The approach covers highly digital business models but goes wider – broadly focusing on consumer-facing businesses with further work to be carried out on scope and carve-outs. Extractive industries are assumed to be out of the scope.
- New Nexus: For businesses within the scope, it creates a new nexus, not dependent on physical presence but largely based on sales. The new nexus could have thresholds including country-specific sales thresholds calibrated to ensure that jurisdictions with smaller economies can also benefit. It would be designed as a new self-standing treaty provision.
- New Profit Allocation Rule: going beyond the Arm’s Length Principle. It creates a new profit allocation rule applicable to taxpayers within the scope and irrespective of whether they have an in-country marketing or distribution presence (permanent establishment or separate subsidiary) or sell via unrelated distributors. At the same time, the approach largely retains the current transfer pricing rules based on the arm’s length principle but complements them with formula based solutions in areas where tensions in the current system are the highest.
- Increased Tax Certainty: delivered via a Three-Tier Mechanism. The approach increases tax certainty for taxpayers and tax administrations and consists of a three-tier profit allocation mechanism.
For more detail on the Public Consultation Document please click here.
