The OECD/G20 Inclusive Framework on BEPS published a statement on the two-pillar approach to address the tax challenges arising from the digitalisation of the economy. In their meeting of January 29-30, the members of the Inclusive Framework (IF) affirmed their commitment to reach an agreement on a consensus-based solution by the end of 2020.
Pillar One
As for Pillar One, the IF endorses the Unified Approach (set out in Annex 1 of the statement) as the basis for the negotiations of a consensus-based solution to be agreed in 2020. The proposed reallocation of taxing rights under Pillar One would require improved tax certainty, including effective and binding dispute prevention and resolution mechanisms. In the design and implementation of the solution, the IF also acknowledges the need to minimise complexity.
The IF members noted a December 3 letter from the US Treasury Secretary reiterating the US political support for a multilateral solution and including a proposal to implement Pillar One on a ‘safe harbour’ basis. Many IF members expressed concerns that implementing Pillar One on a ‘safe harbour’ basis could raise major difficulties, increase uncertainty and fail to meet all of the policy objectives of the overall process. In addition, the IF members recognised a number of other issues where significant divergences will have to be resolved. These include (i) the binding nature of dispute prevention and resolution mechanisms as well as the scope of the dispute resolution mechanisms under Amount C; (ii) the suggestion by some members to weight the quantum of Amount A to account for different degrees of digitalisation between inscope business activities (so-called “digital differentiation”); and (iii) the suggestion by some countries to account for regional factors in computing and allocating Amount A (through regional segmentation). Members noted that concerns have been expressed by some jurisdictions and businesses about the continued application of Digital Service Taxes (DSTs).
Pillar Two
With respect to Pillar Two, the IF welcomed the significant progress the working parties have been able to achieve on the technical design of the Pillar. They noted, however, that more work needs to be done, as described in more detail in Annex 2 of the statement.
The IF noted the good progress on the economic analysis and impact assessment of Pillars One and Two and called for continued efforts to strengthen the analysis with caution due to data limitations and for more detailed analysis on the investment and growth impacts of the proposals before the end of March 2020. In this environment, IF members reaffirmed their commitment to bridge the remaining differences and to reach agreement on a consensus-based solution by the end of 2020, noting that this agreement will depend on the further concurrent work which will be carried out on the two pillars. An important step will be its next meeting in early July, at which it is intended to reach agreement on the key policy features of the solution which would form the basis for a political agreement.