Co-authored by Paul Hildebrandt.
In February and March of 2019, the OECD organized a public consultation process, releasing a consultation document on February 13, 2019, inviting public comments up until March 6, 2019, and holding a conference where industry experts presented key issues on March 13 and 14, 2019. The consultation document sets out a range of possible solutions to what have been identified as important issues for managing the tax challenges of an international digital economy. Despite the limited time frame of the consultation process, approximately 200 comments were received.
The OECD/G20 Base Erosion and Profit Shifting (BEPS) Project consists of 15 discrete action areas which target gaps in the international tax system that enable the shifting of profits away from the jurisdiction of the underlying economic activity. Action 1 of the BEPS Project is focused on tax challenges associated with digitalisation.
The Task Force on the Digital Economy (TFDE) developed the 2015 BEPS Action 1 Report, "Addressing the Tax Challenges of the Digital Economy", which was released in October 2015 as part of the full BEPS Package and was endorsed by the G20 Leaders in November 2015.
In June 2016, the OECD/G20 Inclusive Framework on BEPS (the "Inclusive Framework") was established to collaborate on the implementation of the BEPS Package and the mandate of the TFDE was extended to include the delivery of an interim report by 2018 and a final report in 2020.
In March 2018, the Inclusive Framework delivered its Interim Report which provided analysis, but no conclusions, regarding the tax challenges of the digital economy.
In January 2019, the Inclusive Framework produced a Policy Note which established two pillars, or focal points for discussion, on the digitalisation of the economy: problems raised directly by digitalisation and general BEPS problems exacerbated by digitalisation.
The public consultation document released in March 2019 describes the Inclusive Framework's proposals concerning the two pillars established by the January 2019 Policy Note.
Proposals and Comments for Specifically Digital Issues: Profit Allocation and Nexus Rules
The key issue addressed by the proposals regarding profit allocation and nexus rules is how "remote" participation in a domestic economy should be taxed. As the Interim Report identified, there are three characteristics of the digital economy which pose taxation difficulties: the possibility of having scale without mass, a heavy reliance on intangible assets, and the significant role of data and user participation.
The public consultation document proposed three solutions: (i) the User Participation approach; (ii) the Marketing Intangibles approach; and (iii) the Significant Economic Presence approach. These proposed...