OECD on Digital Service Tax: What’s Ahead for 2021?

The challenge of how to fairly tax the digital economy was identified in the OECD’s BEPS initiative as ‘Action 1: Addressing the Tax Challenges of the Digital Economy’. The standard rules in place today do not capture certain business models that make profits from digital services in a country without being physically present. This has created an imbalance, where bricks and mortar companies are taxed at a much higher rate in these countries than companies that don’t have a physical location.

Countries worldwide agree that a global solution is key to solving this challenge of physical nexus and profit sharing. As such, the OECD has been working on different proposals to find a long-term solution to address this issue. After months of preparation, the proposal was finally unveiled to the public for consultation in October 2020.

The Pillar One Blueprint

Pillar One seeks to introduce new rules for certain digital business models, including Automated Digital Services (ADS) and Consumer Facing Businesses (CFB), that are above certain thresholds of worldwide sales or revenues and that have a substantial amount of business activity in the user’s jurisdiction.

There are, however, many uncertainties around how each category will be defined for the purposes of Pillar One – something the OECD is sure to flesh out in the coming months. These rules will essentially create a new taxing right for market jurisdictions on a share of the residual profits of a multinational enterprise or segment of such company. This taxing right is referenced in the blueprint as ‘Amount A’.

Roll out of Pillar One

On 14 January 2021, the OECD met to address comments from the public regarding the plan to roll out Pillar One. The overarching feedback from companies in attendance: these new rules are too complex. OECD members stated that simplification is at the top of the list when it comes to making changes to Pillar One. Other members reiterated that a lack of consensus from the business community is a contributing factor to the complexity of the new proposed rules.

There was significant pushback from key companies that would be caught in the web of these new rules, should they become effective. Representatives from Uber and Proctor & Gamble stressed that simplifying “Amount A” is vital to the success of these new rules, with requests from both companies to continue to examine exactly what ’Amount A’ will encompass.

Additional concerns were raised about new risks and disputes that this new taxing right will bring. In addition to concerns over the scope of ‘Amount A’, companies also raised concerns about double taxation, stating that the current Pillar One Blueprint guidance doesn’t provide enough detail as to how double taxation challenges will be handled.

The fate of the current proposal is now in the hands of the OECD. They’ll need to decide what feedback to implement into the Pillar One Blueprint. The goal is to present the agreed-upon global solution at the G20 Summit in July 2021.

On the same day as the OECD meeting, the European Commission released its own consultation document that is largely in-line with the OECD proposal, but with additional focus on tax revenues in the EU. The release of this document seems to indicate that if there isn’t a global solution in place by mid-year, the EU will have a backup plan to address the challenges with tax digitisation.