On Wednesday, the Institute responded to the OECD’s public consultation on Addressing the Tax Challenges of the Digitalisation of the Economy. The Institute raised a number of concerns relating to the proposals currently being discussed by members of the Inclusive Framework, regarding revised profit allocation and nexus rules under Pillar 1 and a global anti-base erosion proposal to address remaining BEPS concerns under Pillar 2.
In our submission, we noted our strong support for a reform of the international tax system that is sustainable in the long-term and we encourage the Inclusive Framework to achieve an early consensus on the way forward regarding the revision of profit allocation rules under Pillar 1. However, we highlighted that it is critical that whatever consensus is reached on changing the international tax framework, it should continue to be aligned as closely as possible with the core principle underpinning the BEPS project, that profits are taxed where the underlying substantial activity takes place and value is created. We also stressed the importance of retaining, insofar as possible, the arm’s length principle that has been developed by the OECD over decades and which is comprehensively applied and understood by both businesses and competent authorities.
Regarding Pillar 2, we recommended that adopting a longer-term perspective would be more appropriate to fully understand any remaining BEPS concerns, given the extent of the BEPS measures which are still being implemented by members of the Inclusive Framework and the EU, in addition to the ongoing work on preferential tax regimes and the operation of the EU list of non-cooperative tax jurisdictions (‘The EU Blacklist’). In light of these circumstances, the requirement for a global minimum tax rate proposed under Pillar 2 is not yet evident in our view. Instead, we suggested consideration could be given to building upon the existing work of the Forum for Harmful Tax Practices, regarding preferential tax regimes and the EU Blacklist, as a possible way of reaching a global consensus on measures related to ‘undertaxed’ payments.