Further to the last round of deliberations on addressing tax challenges of digitalization of economy by OECD under its Inclusive Framework Policy and subsequent endorsement by G20 Group in June 2019, OECD has now released another Public Consultation Document (attached) under a “Unified Approach” that seeks to implement a consensus solution by end of 2020.
OECD recognizes the importance of designing a solution that attracts support from members of Inclusive Framework and aims to identify key features of a solution, which would include the following:
- Scope: The approach aims to cover highly digital business models and goes wider – broadly focusing on consumer-facing businesses with further work to be carried out on scope and carve-outs.
- New Nexus: For such businesses, the approach creates new nexus which is not dependent on physical presence but largely based on sales. This 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 have increased due to digitalisation of economy.
- Increased Tax Certainty delivered via a Three Tier Mechanism: The approach aims to increase tax certainty for taxpayers and tax administrations and consists of a three tier profit allocation mechanism specified in the consultation paper.
The consultation paper describe in detail key components of the “Unified Approach” along with examples to illustrate its application. With this, OECD hopes to offer a binding and effective dispute prevention and resolution mechanisms that will stabilize the international system.
In this regard, OECD has sought views from stakeholders on certain policy, technical and administrative issues highlighted in the paper.
We request you to provide us your inputs on the questions specified in the consultation paper and suggestions on how it may be improved so as to ensure fairness and certainty on the incidence of taxation in a manner that imposes least compliance burden. Kindly provide appropriate justification and examples to substantiate your point of view.
As the last date for submitting comments to OECD is November 12, 2019, we would request you to send us your feedback on the proposals from India perspective latest by November 1, 2019 (i.e., Friday) to firstname.lastname@example.org
Let me know in case you require any clarification.