Transfer Pricing Times: OECD Airs Measures To Address Tax Challenges Of Digitalization Of The Economy

In this edition: The OECD unveiled the latest proposals to address the tax challenges of the digitalization of the economy; the IRS updated its tax statistics database with Statistic of Income data for tax year 2016; Duff & Phelps spoke at the 2019 TP Minds Americas Conference; the Spanish tax authorities announced the Tax Control Plan for FY2019; Political developments in Spain postpone the implementation of the Digital Services Tax; German tax authorities to impose withholding tax on online advertising; and the Indonesian tax authority issued Regulation No. PER-02/PJ/2019 concerning procedures for the Submission, Receipt and Processing of Tax Returns.

OECD Airs Measures to Address the Tax Challenges of the Digitalization of the Economy IRS Publishes Aggregate Country-by-Country Report Statistics Duff & Phelps Experts Speak at TP Minds Americas 2019 Spanish Tax Authorities Announce the Tax Control Plan for FY2019 Political Developments in Spain Postpone the Digital Services Tax German Tax Authorities to Impose Withholding Tax on Online Advertising New Regulations Issued by Tax Authority in Indonesia OECD Airs Measures to Address the Tax Challenges of the Digitalization of the Economy

The OECD has unveiled the latest proposals towards achieving consensus on the development of a long-term solution for the tax challenges raised by the digitalization of the economy, which potentially have far-reaching ramifications for transfer pricing and the continued application of the arm's length principle. On January 29, 2019, the OECD released a policy note, in the name of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS), that identified two central "pillars" for further discussion.

The first pillar will consider how market territories can take a portion of the profits of multinational groups operating digital business models, to which they feel entitled but are currently denied through the absence of a taxable presence under existing transfer pricing principles. It proposes addressing this through an examination of the rules concerning "nexus" and profit allocation.

The second pillar seeks to render transfer pricing planning less attractive, if not irrelevant, through German and French sponsored proposals for the effective imposition of a minimum global tax rate for multinational groups.

The Inclusive Framework has followed up this policy note with a public consultation document, released on February 13, 2019, which provides more detail on the two pillars.

The first pillar will consider three proposals for revising the nexus and profit allocation rules: through the concept of "user contribution" already advanced by the UK government, a U.S. suggestion concerning recognition of marketing intangibles in a market territory, and a more recently submitted proposal from India concerning significant economic presence.

While the UK proposal is limited to digitalized business models, the U.S. proposal has the potential for a far wider impact across the whole economy. Both proposals would see a significant move away from the arm's length principle in the attribution of profits to the market territory deemed to be contributing value in the form of user contribution or local marketing intangibles, introducing a form of global formulary apportionment, described as "a new type of residual profit split method", requiring a move away from traditional transactional analysis.

The...