Tax security and certainty are the backbones of the world of taxes. The goal of the OECD/G20 BEPS project is to create a consensus-based international tax rule to address base erosion and profit shifting, thereby protecting tax bases. At the same time, this also ensures the provision of more certainty and predictability to the taxpayer.
The development of BEPS 2.0
On the 14th of October 2020, the OECD, with support of the G20, published the Tax Challenges Arising from Digitalisation report on the BEPS 2.0 Pillar One¹ Blueprint. The deadline for (draft) submissions for the report focusing on Pillar Two² was the 14th of December 2020, with virtual public consultation meetings on the 14th and 15th of January 2021. Reports with a consensus solution and elaboration of technical aspects are expected to be published during this year, with implementation – using MLI – for the relevant agreement by the end of 2021.
¹In Pillar One the profits are redistributed among market countries.
²Pillar Two introduces the global minimum tax rates.
Pillar One aligns tax rights with the involvement of the local market. There is a need for a multination consensus for this to happen; otherwise, the unilateral digital tax measures could increase significantly.
Pillar One is a series of proposals to rethink tax allocation rules in a changing economy. The intent is to attain some of the remaining profits of multinational corporations taxed in the jurisdiction resulting in revenue. Think of residual profit generated by capital, risk management functions, and/or intellectual property. Automated Digital Services (ADS) and Consumer-Facing Businesses (CFB) apply as well. This makes the scope wide enough so that the encompassing companies can benefit from significant and long-lasting interactions with customers and market users. This process links tax rights related to these companies‘ income sources, which do not need to depend on physical presence in the jurisdiction.
The new tax law awards high profits based on a formula, which does not necessarily take the business position. Amount A includes winnings earned through online activities of an automated digital nature of goods or services sold to consumers, including the associated IP licenses. Specific inclusions and exclusions are suggested from this. In addition, Amount A has been allocated based on local revenues, determined through procurement rules, with elimination measures for double taxation.
Amount B is the standard business compensation for ‚baseline‘ routine marketing and distribution activities. Alternative methods for this Amount can be applied if supported by evidence.
What companies should be aware of
The changes regarding taxation have a multinational set-up. They are also technically complex; the effects and uncertainties will be drastic for many companies. The size of the covered companies is not yet final. However, this is by no means limited to highly digitized business models.
Implementation of the BEPS 2.0 measures is likely to occur soon, although many details are still unclear. The rules do not only apply to classic digital companies. In addition, these rules will shift the installation location in favor of the market states. The technical implementation is demanding; the demands on availability and integrity of data are high. New risks of double taxation are emerging, which can probably only be mitigated by international communication processes.
It is important to stay on top of the news and keep your business as stable as possible. Useful and necessary information on BEPS can be found on the websites of OECD and KPMG. Seeking professional assistance is always helpful to avoid potential issues. We are always here to hear your needs.
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