The OECD has issued two consultation documents seeking comments on its proposals for tackling the tax challenges arising from the digital economy.

The first of these proposals (“Pillar One”), published on 9 October 2019, sets out the OECD’s plans for reallocating the right to tax the profits of multinational enterprises (“MNEs”) among governments based on new nexus rules. The Pillar One consultation document provides a high level summary of what it terms a “Unified Approach”, consolidating various earlier proposals.

The second proposal (“Pillar Two”), published on 8 November 2019, invited comments on the OECD’s proposal to introduce globally a minimum profit tax rule potentially requiring the payment of top-up profit taxes.

On 31 January 2020, the OECD issued a statement (the “Statement”) providing further detail and reporting progress. The Statement focuses on reporting progress regarding ‘Pillar One’ and at this time, reports no further substantive progress in relation to Pillar Two. The Statement also sets out issues where further consideration is required. Importantly, there is now an outline structure for how the Unified Approach will operate and political agreement that this proposal will be the basis for negotiation when the OECD next meets in July 2020. The OECD is expecting to finalise its plans by the end of 2020, at which point members of the Inclusive Framework can begin to implement the Unified Approach in their domestic legislation.

Adopting an international consensus for taxing the digitalised economy has become critical to prevent the same MNE profits becoming subject to multiple national taxes, which is a very clear and present danger arising from the operation of an increasing number of national digital services taxes (“DST”). The governments of France and Italy, for example, adopted (France in 2019 and Italy in 2020) a 3% DST on revenues of businesses arising from the supply of certain in-scope digital services to users located in these countries. The in-scope services are defined as the provision of a digital interface allowing users to be in contact and interact with other users in order to facilitate the direct supply of goods or services, targeted advertising services and services related to users’ data. These DSTs apply only to in-scope revenues of businesses with a worldwide turnover in excess of EUR750m (turnover from in-scope services for France and overall turnover for Italy) where the turnover from in-scope services supplied locally during the previous calendar year exceeds a certain threshold (EUR25m in France and EUR5.5m in Italy).  

In 2018 it was announced the UK will be introducing from April 2020 a similar DST unless “appropriate international measures” are in place by then. The next UK budget statement will be on 11 March 2020 and this should contain an update. The DST is to be chargeable at 2% and in-scope business models are described as a social media platform generating revenues from targeting adverts at UK users, a marketplace generating commission by facilitating a transaction between UK users and a search engine generating revenues from displaying advertising against the result of key search terms inputted by UK users. Businesses will only be caught if they generate revenues from in-scope business models of at least £500m globally and the first £25m of relevant UK revenues will not be chargeable. A safe harbour is proposed in that businesses can elect to calculate their DST liability on an alternative basis, which should benefit those with very low profit margins; and those making losses or on very low margins will not have to pay the DST or pay DST at a reduced rate.

France, Italy and the United Kingdom (as noted in the policy paper produced by the UK Government under the “Policy Objective” heading) have agreed to review, make adjustments or even disapply their national digital services tax should such an international consensus be reached.

Pillar One  

Unified Approach: Summary  

The OECD is proposing to provide market (user) countries with a new taxing right in respect of residual (or non-routine) profits of MNEs. The new nexus will be based on the location of MNEs’ sales and consumers, rather than the tax residence, physical place of establishment or the location of a dependent agent of an MNE. In addition, to provide more certainty, a rebuttable simplified fixed remuneration is proposed for baseline marketing and distributions activities physically present in a country.   The OECD has proposed a three-tier mechanism to implement the Unified Approach. Amount A focuses on calculating then allocating deemed non-routine profits of MNEs among market jurisdictions for taxation in those jurisdictions. Amounts B and C concern the taxation of marketing and distribution functions of MNEs, dealing with the taxation of “baseline activity” and the taxation of amounts above this baseline, respectively. This is set out in more detail below.  

Unified Approach: Amount A  

Amount A – Amount A is proposed to reallocate, for local profit taxation, certain group level profits of MNEs to the jurisdiction(s) from whose market that profit is generated, irrespective of whether or not an MNE has a physical presence there. Generally, this new taxing right will be awarded to the location of the user or marketplace. The taxable profit to be so reallocated will be calculated by reviewing the total profits made from a certain business line, region or market country, considering what a deemed “routine profit” for the business line would be and subtracting this designated “routine profit” from total profits. The remainder (the “residual profit”) would be subject to the market jurisdictions’ new taxing right, unless it is attributable to other factors such as trade intangibles. Under the Unified Approach, businesses would need to review the profits made in all jurisdictions in which they operate to determine whether profits are “routine” and if not, work out how much of that profit is likely to form Amount A.  

Amount A: Scope  

Significant headway has been made to define business models within scope for Amount A taxation. The new nexus rules will not only be relevant to multi-national digital service providers, but also consumer-facing businesses which use digital technology to interact with their consumers, whether through marketing and branding activities, or through data collection. Helpfully, the OECD have provided a (non-exhaustive) list of businesses which are in scope, under the banners of “automated digital services” and “consumer-facing businesses”. The automated digital services list unsurprisingly contains business models such as providers of online search engines, content streaming, online marketplaces and cloud computing services. The consumer-facing business list is broader than initially expected and includes providers of:

  • personal computing products;
  • clothes, toiletries, cosmetics, luxury goods;
  • branded food and refreshments;
  • franchise models, such as licensing arrangements involving the restaurant and hotel sector; and
  • automobiles.

It is therefore imperative that any business which has any interaction with consumers should consider whether it will be in scope for Amount A taxation.  

Concerns regarding carve-outs from the Amount A scope have also been addressed. Extractive industries and producers and sellers of raw materials and commodities will not be within scope. Less certainty is given on a blanket carve-out for financial services. The Statement predicts that most financial services will be supplied to commercial customers and therefore not within scope, but only goes so far as to say that there is a “compelling case” for consumer services to be exempted, on the basis that they are already heavily regulated.  

Amount A: Thresholds  

Different thresholds will apply for different business models to be in scope for Amount A taxation. For automated digital businesses, the only threshold which must be met is a gross-revenue threshold, which is suggested to be €750m. Consumer facing businesses would have the added protection of an aggregated in-scope revenue threshold, and will also be exempted if total profit to be allocated under the taxing right does not meet a de-minimis amount. The rationale behind the extra layer of thresholds for consumer-facing businesses is to ensure that new taxing rights regarding Amount A are only granted to a user market where there is “sustained interaction” with that market, and there is an understanding that merely selling tangible goods cross-border will not necessarily meet this description. In order to demonstrate how these thresholds will operate, the OECD have provided a “decision-tree”, which can be found here.  

Amount A: Computation and Allocation  

The calculation and allocation of Amount A will see a move away from the traditional profit tax approaches. Instead of using the traditional “separate entity” method used for transfer pricing, Amount A will be based on profit derived from the consolidated group accounts. Possibly, the quantum of Amount A may be weighted to take into account how digitalised an in-scope business activity is.  

While the method of allocating profit to a market jurisdiction is likewise not confirmed, this is to be based on the location of the ultimate consumer. For example, online advertising revenue will be deemed to arise where the advertising is viewed and not, as currently, where the advertising is purchased.  

Such approach would encompass MNE digital services currently within the scope of national digital services taxes.  

Unified Approach: Amount B  

Amount B – The Unified Approach is proposing to determine the taxable profits attributable to routine marketing and distribution activities of an MNE using a fixed return or percentage, with these profits continuing to be taxed in the jurisdiction where the relevant activities are carried out. The OECD’s stated intention in going beyond current transfer pricing rules in this way is to reduce tensions and disputes relating to the pricing of distribution and marketing activities. While it is unclear whether the use of fixed returns will indeed reduce the number of disputes, businesses will certainly need to prepare for additional compliance burden and less flexibility in determining the pricing of, and taxation that can be levied on profits from, marketing and distribution activities.  

The Statement provides further detail on the meaning of “baseline distribution activities” for the purposes of Amount B. This is likely to include “distribution arrangements with routine levels of functionality, no ownership of intangibles and no or limited risks”. Businesses whose arrangements involve the cross-border sale and purchase of tangibles and intangibles should therefore be aware of the differences between current transfer pricing models and the method envisaged by Amount B.  

Unified Approach: Amount C  

Amount C – Where the baseline profit established under Amount B is less than the profit actually produced by the marketing and distribution activities, the proposed Unified Approach would tax any additional profit as Amount C.  

Pillar Two   The OECD’s objective under Pillar Two is to introduce globally a minimum level of tax on profits of MNEs through a cohesive set of rules. The consultation document describes this “Global Anti-Base Erosion Proposal” (also known as “GLoBE”) as a top-up to an agreed fixed rate of profit tax.  

The OECD’s GLoBE work appears to be only at an early stage, but the current proposal is to use profit figures from MNEs’ financial accounts with minimal adjustments (such as the exclusion of dividend income) to determine whether sufficient profit tax has been paid by the MNE in question. The levying of a top-up tax on MNE profits is proposed where the amount of actually paid profit tax relative to the accounting profits is less than the “minimum level” of profit tax. Although no indication has been given by the OECD as to what the minimum rate of tax will be, examples in the OECD consultation document use a minimum tax rate of 15%.  

The OECD has not confirmed whether the measuring of the effectively paid profit tax against the expected minimum profit tax would be applied on a global (i.e. per MNE basis), per country or per entity basis. The OECD is also exploring whether taxpayers can mix low-tax and high-tax income within the same entity or across different entities within the same group in a process known as “blending.”  

The top-up taxation is proposed to be achieved through a combination of withholding taxes, controlled foreign company-type taxes, disallowing deductions for expenses and rules that allow or oblige switching to the credit method from the exemption method for double taxation relief.  

Outstanding issues  

The OECD recognises that there is still progress to make. There will be a focus on ensuring that the new allocation of taxing rights regarding Amounts A, B and C will not lead to multiple taxation of the same profits.   Issues which still need to be resolved, and which are indicated to be sources of disagreement between members of the Inclusive Framework, are:  

  • the binding nature of dispute prevention and resolution mechanisms, especially in relation to Amount C. The creation of an international review panel is suggested, which would provide early tax certainty in relation to Amount A and prevent disputes later down the line, though no consideration is given as to the practicalities of introducing such a system;
  • weighting the quantum of Amount A depending on the degree of digitalisation of the business activity which is within scope (which is referred to as “segmentation” in the Statement); and
  • allowing for regional factors in computing or allocating Amount A.

  A “Global Safe Harbour” approach?  

In December 2019, US Treasury Secretary Steve Mnuchin wrote to the OECD secretary-general raising concerns over mandatory compliance with Pillar One architecture. He suggested a “safe harbour” approach, such that compliance with Pillar One would be optional, so long as the jurisdiction could prove they complied with other (yet to be defined) measures.

The Statement confirms that the OECD will consider a “safe harbour” approach. This is a strong indication that, despite several confirmations that a multilateral agreement will be reached by the end of 2020, an entirely different set of rules may emerge.  


The OECD has made considerable progress towards a comprehensive international consensus by proposing the Unified Approach but the proposals under Pillar Two are not as developed. However, at this stage the OECD’s proposals do not address concerns relating to the practicalities of allocating, calculating and collecting any additional tax. Many MNEs may not currently identify profit by market jurisdiction, region, or business line in the way for Amount A under Pillar One, nor rigidly define and separate their baseline marketing and distribution activities as envisaged under Amounts B and C. Further, clarification is still needed on how businesses will be required to calculate “routine-profit” and determine fixed remuneration for baseline marketing and distribution activities.

The OECD is clear that it intends for a multilateral agreement on Pillar One to be formalised by the end of 2020, and that it expects the design as set out in the Statement to be the starting point for negotiations commencing in the summer. It is also firm in its view that countries cannot properly commit to such agreement if they continue to enact (or do not withdraw) unilateral digital services taxes. The UK government has not commented on the Statement and there is no indication from the UK government that it will not carry on with its plans to introduce a digital services tax in April. Businesses will likely have to wait until the Budget on 11 March 2020 for clarity.

The proposed in-scope activities for Amount A should encourage businesses with any consumer-facing or cross-border element to assess the risk of whether or not they are within the scope of the new nexus rules under Pillar One. The OECD’s Unified Approach is fast making progress, and it is not only traditionally “digital” businesses which are within its sights.

The taxes proposed by both Pillar One and Pillar Two are intended to form an additional layer over pre-existing profit taxation. Presumably implementation would be through a multi-lateral instrument similar to the MLI implementing the treaty-based BEPS proposals. A two-tier system of profit taxation is likely to give rise to complexities and challenges, and businesses would be wise to consider how they might best prepare for the changes proposed by the OECD, including preparing for the increased compliance burden and reporting requirements.