10 march 2020
At the end of 2019 the OECD released the Programme of Work to Develop a Consensus Solution to the Tax Challenges Arising from the Digitalisation of the Economy. Measures proposed by the OECD will impact not only digital economy, but also other sectors focused on customer communications.
In our opinion, it can be said that the OECD’s programme of work will be approved as a biding instrument in this year 2020; however, it is already at the start of the year important to understand and analyze the substance of the proposals set forward by the global regulator. Even though Belarus is not a party to the said initiatives and member of the credible organization, it is significant to note that 129 members of the OECD endorsed the Programme of Work which sets out the procedure for reaching a new global consensus solution to taxation of multinational companies.
The OECD’s programme pushes for international discussions under two main ‘pillars’ or areas of cooperation (PILLAR 1 and PILLAR 2).
PILLAR 1 considers potential solutions to determine where and on what grounds taxes shall be paid, as well as what part of profit can or shall be subject to tax in the jurisdictions where major customers or users are located. When a significant amount of local sales is achieved, a group of international companies forms a remote taxable presence in the country of sale (in the country where users and/or buyers of goods/services are located). It is supposed that this concept will be introduced in addition to the existing provisions on permanent establishments.
It should be considered that additional taxation may arise both in case of sales of goods/services by a local branch forming a permanent establishment and sales of goods/services directly to third parties without participation of the so-called permanent establishment. It is important that remote taxable presence of a group of companies in the country of sale will depend on the volume of local sales, while the corresponding share of residual profit will be determined by a special formula.
It is being discussed and proposed to determine a fixed level of remuneration for performing basic functions in the field of marketing and distribution in the country of sale. Fixed remuneration will apply to those groups of international companies having physical presence in the country of sale, either in the form of a subsidiary or a permanent establishment. And remuneration for performing additional functions in the country of sale, other than basic functions in the field of marketing and distribution, will be determined in accordance with the current transfer pricing rules (the arm's length principle).
PILLAR 2 would provide countries with a new instrument for protection against shifting of profit of multinational companies to jurisdictions where they are subject to no or very low taxation. The point being, to establish the minimum income tax rate for international companies and to ensure that their income is taxable at a rate not lower than the minimum one.
The four component parts of the Global anti-base erosion proposal are:
1. An income inclusion rule that would tax the income of a foreign branch or a controlled entity if that income was subject to tax at an effective rate that is below a minimum rate;
2. An undertaxed payments rule that would operate by way of a denial of a deduction or imposition of source-based taxation (including withholding tax) for a payment to a related party if that payment was not subject to tax at or above a minimum rate;
3. A switch-over rule to be introduced into tax treaties that would permit a residence jurisdiction to switch from an exemption to a credit method where the profits attributable to a permanent establishment (PE) or derived from immovable property (which is not part of a PE) are subject to an effective rate below the minimum rate;
4. A subject to tax rule that would complement the undertaxed payment rule by subjecting a payment to withholding or other taxes at source and adjusting eligibility for treaty benefits on certain items of income where the payment is not subject to tax at a minimum rate.
In our opinion, implementation of the proposed and above mentioned measures will require a substantial revision of many international double taxation treaties and national tax laws of a number of countries.
ADDITIONAL INFORMATION AND CONSULTATION:
Managing Partner of COLLEGIA Law Firm
Certified lawyer Igor Stukanov
Mob.: +375 (29) 623-94-76