OECD statement of Digital Tax Initiative highlights progress, sets timeline for consensus – key points on Pillar One and Pillar Two

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Global Tax Alert

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On January 31, 2020 the OECD published an update statement (the Statement) on the Digital Tax Initiative, highlighting progress on the scope of the new taxation rights and agreeing to a timeline to reach a consensus position by the end of the year.1  However, many difficult issues remain unresolved, and the OECD working groups have established an aggressive timeline to reach this consensus and hold off unilateral digital tax policies currently planned by over a dozen countries. Indeed, France has agreed to postpone implementation of their digital tax and the US has agreed to postpone retaliatory tariffs while resolution of the OECD initiative is ongoing.

In 2015, under Action Plan 1 of the OECD Base Erosion and Profit Shifting initiative, the Task Force on the Digital Economy concluded that the digital economy raised fundamental issues around tax nexus, the role of digital users’ data in the digital economy, digital income characterization, and allocation of digital economy income among jurisdictions, especially among digital user jurisdictions. In 2019, the OECD issued several working papers and discussion drafts on conceptual methods to compute this new taxing right, which is presented as two pillars.

  • Pillar One, new nexus and profit allocation rules, in which the new taxing right is a form of residual income of the overall company or business unit based on user participation whether or not the company has a physical presence in a jurisdiction, is called the Unified Approach.
  • Pillar Two focuses on enhanced BEPS actions that create a minimal tax requirement for global income, similar in spirit to the US GILTI and BEAT regulations of the 2017 US Tax Cuts and Jobs Act (USTCJA).

The Statement confirms that the member countries of the Inclusive Framework (IF), nearly 140 countries, established that the Unified Approach is the basis to address the taxation of the digital economy and changes to the international tax rules. The delegates of the IF affirmed their commitment to reach an agreement on a consensus-based solution by the end of 2020. Importantly, the Statement proposes that any consensus-based agreement will include a commitment by members to withdraw unilateral actions on Digital Tax. However, the Statement is issued without prejudice; the positions articulated will require a consensus before they are accepted by the member countries.

The Statement contains further guidance on key policy and technical matters that will be further developed according to the timeline included in the document itself. The IF meeting of July 2020 is a fundamental milestone: the goal of that meeting is to reach agreement on the key technical issues of the new taxing right. A final report is envisioned by the end of the year.

1. Pillar One – some clarity on scope

Scope related guidance

A key question for many companies is determining whether they fall within the scope of the Pillar One rules and the new taxing right. The Statement provides some important clarifications on this point.

The Statement presents two type of businesses that would be within scope of the Pillar One rules: (i) automated and standardized digital services and (ii) consumer facing businesses. The following sectors are specifically mentioned as being in scope:

  1. Automated digital services: These are companies that can develop an active and sustained presence in remote locations without physical presence. Examples include online search engines, social media platforms, intermediate platforms, digital content screening, online gaming, cloud computing services, and online advertising services.
  2. Consumer facing businesses: These are companies that sell goods or services but engage with their customer base through targeted marketing, branding and use of individual data. Examples include personal computing products (eg, software, home appliances, mobile phones), clothing, toiletries, cosmetics, luxury goods, branded foods, refreshments, franchise models, (hotel and restaurant licensing), and automobiles. Products for commercial and professional use would be exempted.

Both of these lists are non-exhaustive and subject to modification as the working groups move forward in 2020.

The Statement further reiterates that extractive industries and financial services should be excluded from scope with some restrictions if companies operate different business lines that cross industries and sectors.

As companies continue to assess the applicability of these rules to their business, it is important to note that the Statement is implying that, for an entity with multiple business lines, segmentation of these business lines between in-scope and out of scope activities would be required. In the public consultation, many companies indicated that the administrative burden of such (financial) segmentation would be significant. Nonetheless, for the moment, the OECD appears to endorse the segmentation principle.

The Statement also supports threshold levels to assess relevance of the new taxing right. These include consolidated gross revenues for the company, total revenues associated with the taxing right, and materiality thresholds for the level of tax.

Key issues to be addressed in 2020

In contrast to scoping issues, the Statement appears to provide little insight on many other key issues concerning Pillar One, but rather highlights the issues to be addressed in 2020. These include the complex issue of the treatment of deductions and credits to avoid double taxation as a result of the new digital tax. The Statement acknowledges the inadequacies of current treaties and the need for binding arbitration processes. The Statement also includes a list of 11 issues areas to be addressed, including varying the taxing right by level of digitalization and geography, new nexus rules, financial baselines and tax base determination, the mechanics of the formulary taxing right, dispute resolution, and administration issues.

The Statement acknowledges the US safe harbor proposal. The OECD intends to address the option of having Pillar One act as a safe harbor if and when all technical details of Pillar One are agreed upon. Based on the comments during the OECD’s January 31 webcast, there seem to some reservations within the OECD on the effectiveness of a safe harbor Pillar One scenario.

2. Pillar Two – progress, but little clarity

Pillar Two consists of a global anti-base erosion proposal aimed at ensuring that the profits of internationally operating businesses are subject to a minimum rate of tax. Pillar Two had fewer open issues than Pillar One, and the Statement simply states that “…work on key issues is advancing at a fast pace.”

The four rules at the base of the proposal were confirmed (Income Inclusion Rule, Undertaxed Payments Rule, Switch-over Rule, and Subject to Tax Rule) but IF still needs to define major design elements, starting from the order in which its rules apply which will determine what countries benefit from the additional tax payments.

Consistent with the October 2019 version of the Secretariat Proposal on Pillar Two, a broader discussion has been held on the Income Inclusion Rule. In particular, IF confirmed that it will operate as a top-up to an agreed fixed rate, which has yet to be determined. On the important question of income blending the ability to offset low-tax income with high tax income in determining the effective rate the Statement acknowledges multiple policy choices, but makes no recommendation at this time. During the webcast, the OECD speakers appeared to point to “jurisdictional blending” as having the broadest support within the IF. The Statement notes that carve-outs are an important point of consideration eg, the rules might include an exception from Pillar Two for companies with economic substance in a jurisdiction.

As with Pillar One, many open issues must be resolved by the July meeting.

3. Final remarks

The development of a new taxing right is a major initiative, and the OECD continues to work at a brisk pace to address a complex set of design, implementation, and administrative issues to reach consensus by mid-year and a final position by year end. During the January 31 webcast, Pascal Saint-Amans, director of the OECD’s Centre for Tax Policy and Administration, said: “To respond to one of the questions we received ‘What is plan B?’ we don’t have a plan B. What is at stake is indeed a big risk, a trade war.”

DLA Piper will continue to provide updates on this important topic.

To learn more about these developments, please contact any of the authors or your usual DLA Piper attorney.


1 OECD (2020), Statement by the OECD/G20 Inclusive Framework on BEPS on the Two-Pillar Approach to Address the Tax Challenges Arising from the Digitalization of the Economy – January 2020, OECD/G20 Inclusive Framework on BEPS, OECD, Paris.