Digital companies such as Facebook, Google, and Netflix will soon find it difficult to shift profits to low- or no-tax jurisdictions, with the Organization of Economic Cooperation and Development (OECD) proposing measures to ensure they pay a minimum level of tax.
The Paris-headquartered organisation on Friday released a consultation paper proposing rules that would provide jurisdiction with a right to tax back where other jurisdictions have not exercised their primary taxing rights or the payment is otherwise subject to low levels of effective taxation.
India has been leading the global effort to rework the traditional international tax system to make digital firms pay taxes regardless of their physical presence or measured profits in a country.
Base erosion and profit shifting (BEPS) refers to exploiting gaps and mismatches in tax rules to shift profits by multinational companies to low-tax regimes. Internet companies operate out of low-tax jurisdictions, but do business in several others, without having a physical presence and end up avoiding taxes.
The Consultation on Pillar 1 approach was released last month dealing with re-allocation of profit and revised nexus rules. It explores potential solutions for determining where tax should be paid and on what basis (nexus), as well as what portion of profits could or should be taxed in the jurisdictions where clients or users are located (profit allocation).
The OECD secretariat has sought public comments by December 2 on three specific aspects to GloBE — use of financial accounts as starting point to determine tax base, the extent to which a multinational company can combine income and taxes from different sources in determining effective tax rate, carve-outs and thresholds that may be considered.
The OECD’s Pillar Two or GloBE proposals could lead to significant changes to the overall international tax rules under which multinational businesses currently operate, said Rajendra Nayak, partner, EY India.
The proposals would, through changes to domestic law and tax treaties, provide jurisdictions with a right to tax back where other jurisdictions have not exercised their primary taxing rights or the payment is otherwise subject to low levels of taxation, he added.
The proposals are intended to advance a multilateral framework that achieves a balanced outcome, limiting the distortive impact of direct taxes on investment and business location decisions, said Nayak.
A public consultation meeting on the GloBE proposal will be held on December 9.
Rakesh Nangia, chairman, Nangia Andersen Consulting, said pursuant to receipt of proposals from the stakeholders, one can expect the OECD to issue the final consensus based solution to tax this new version of world economy.
Addressing the tax challenges of a digitalised economy may give options to treaty partners and like multilateral instruments, the matching concept may prevail, said Nangia.
Under Pillar 2, four rules are being discussed — the income-inclusion rule, the undertaxed payments rule, the switch-over rule, and a subject-to-tax rule.
The income-inclusion rule aims to tax the income of a foreign branch or a controlled entity if that income was subject to tax at an effective rate that is below a minimum rate. The undertaxed payments rule would operate by way of a denial of a deduction or imposition of source-based taxation (including withholding tax) for a payment to a related party if that payment was not subject to tax at or above a minimum rate.