Taxation of digital economy: Updated framework released by the OECD

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3 Feb


Dittmar & Indrenius > Insight > Taxation of digital economy: Updated framework released by the OECD

On 31 January 2020 the OECD released a statement concerning the current phase of its Inclusive Framework on BEPS which aims to address the tax challenges arising from the digitalisation of the economy. The statement provided further insight on Pillar One, focusing on the allocation of taxing rights, outlining its architecture and its aim to include in its scope both automated digital and consumer facing businesses. For Pillar Two (base erosion and low-tax payments) only a revised Progress Report was released.

OECD aims to reach an agreement on a consensus-based solution by the end of 2020. The next important step for achieving this goal is the meeting in early July 2020, which is intended to result in an agreement on the key policy features of the solution. Considering the current status of the Inclusive Framework and the disagreements remaining, the contemplated timeline appears ambitious.

The Unified Approach and a Revised Programme of Work


OECD considers that challenges relating to the taxation of the digital economy require solutions through a multinational consensus. The work, which builds on the 2015 Base Erosion and Profit Shifting (BEPS) Action Plan, resulted in the Inclusive Framework being published in January 2019, grouping the proposals into two pillars – one of nexus and profit allocation (Pillar One) and another ensuring a minimum level of taxation (Pillar Two).

The progress towards consensus on Pillar One continued and the so-called “Unified Approach” was released for public comments on 9 October 2019. The revised Programme of Work was released on 31 January 2020 containing an outline for the architecture of the unified approach to Pillar One, that can be used as the basis for the negotiation of a consensus-based solution to be agreed by mid-2020.

Updated Outline of Pillar One

Scope: Automated Digital Services and Consumer-Facing Businesses

The recently published outline confirmed that the scope of Pillar One covers two distinct categories: the automated digital services and consumer-facing business.

  • Automated digital services refers to businesses, which create revenue by providing automated and standardised digital services to a large and global customer or user base, such as online search engines, social media platform and cloud computing or online advertising services.
  • Consumer-facing business covers in turn the business that generate revenue from the sale of goods and services of a type commonly sold to consumers referring to the business such as personal computing products (e.g. software, mobile phones), clothes, branded foods and refreshments and franchise models.

However, the definitions for both automated digital services and consumer-facing business are still under further working. At this point, it seems that extractive industries and sellers of raw materials and commodities as well as most of the activities of the financial services sector would be out of the scope, but further consideration is on motion.


Size limitations are also still under consideration, but the outline gives some insight on them. The new rules would be limited to MNE groups that meet a certain gross revenue threshold. Additionally a further carve-out is considered for MNE groups with various businesses, which would apply if the total aggregated in-scope revenue is less than a certain threshold. Similarly as in the October 2019 paper, revenue threshold of EUR 750 million, which is applied also for country-by-country reporting, was mentioned as an alternative.

A carve-out may be also possible if the total profit to be allocated under the new taxing right would not meet a certain de minimis amount. Additional thresholds would be also be involved in the effective computation of Amount A as well as in application of the new nexus rules.

For MNEs in the scope, new nexus rules would be created based on the indicators of a significant and sustained engagement with market jurisdictions and the primary evidence for that would be the generation of in-scope revenue in a market jurisdiction over a period of years. The nexus for automated digital services would only be based on the revenue threshold. For other in-scope activities (e.g. the sale of tangible goods) the new nexus would not be created if the MNE is merely selling consumer goods into market jurisdictions without a sustained interaction with the market.

The new nexus rule would be designed in a way that it remains exclusively applicable only to the new taxing right and e.g. the current permanent establishment rules that are generally built around the concept of physical presence would not be affected.

Further Clarifications on the Profit Allocation Rules

The basic concept of the profit allocation rules remained unchanged from the October 2019 paper, with taxing rights being established based on three components:

  • Amount A: The formula-based amount subject to the new taxing right
  • Amount B: Return for baseline distribution and marketing activities
  • Amount C: Additional profit for in-country functions exceeding those remunerated under Amount B

The calculation of amount A is largely formula based identifying the portion of the residual profits that is to be allocated to eligible market jurisdictions and excluding the business activities in scope that do not exceed certain level of profitability. Where the out-of-scope revenues of a multinational group are material, segmented accounts may be required to capture only in-scope business segments in the allocation of Amount A profits. The rationale and technical feasibility of regional segmentation is to be further explored for a policy decision to be made on its viability. As a new element, it was noted that Amount A could also be weighted based on a “digital differentiation”, which would take into account different degrees of digitalisation between in-scope businesses. The calculation of amount A would be based on a measure of profit derived from the consolidated group financial accounts, with profit before tax (“PBT”) appearing to be the most preferred measure to compute amount A. The Amount A would be allocated to market jurisdictions that meet the nexus thresholds (such as local revenue).

Amounts B and C would not create any new taxing rights, but follow existing profit allocation rules and be based on physical presence and the arm’s length principle. Amount B would be a fixed return based on arm’s length principle for certain baseline marketing and distribution. Amount C would include the profit attributable to in-country activities that exceed those remunerated under Amount B. This simplified approach would, however, require trade-offs between strict compliance with the arm’s length principle and the administrability of Amount B. OECD continues to explore how to account for different functionality levels, differentiation in treatment between industries and regions, as well as on key technical matters (e.g. definition of baseline activities, consideration of an appropriate profit level indicator).

Dispute Resolution and Elimination of Double Taxation

OECD sees that the new approach would be supported by a clear, administrable and binding process for early dispute prevention and resolution. The outline emphasizes that dispute resolution is a key component of Pillar One and the aim is to design clear and simple rules. However, in relation to Amount A, it is presumed that the new approach to the allocation of taxing right pursuant to a mechanical rule and a globally based formula would already on its own reduce the disputes.

Despite the acknowledgement of the importance of these topics, the practicalities regarding dispute resolution and elimination of double taxation are still open. However, one thing seems clear, the OECD’s model appears to be more straightforward under a highly centralized business model. One key question is, how will groups with more decentralized models be able to ascertain tax credits for the new tax (i.e. Amount A) and to not face double taxation.

Implementing the new approach would require changes to domestic legislation and to tax treaties to remove existing treaty barriers. A new multinational convention containing all the international rules needed to implement the unified approach and supersede the relevant provision of existing treaties is considered as a solution for implementation.

Our Insight

The outline for Pillar One provided more detailed information on its architecture and confirmed that both consumer facing and digital businesses are in its scope. However, the outline also included many rather speculative elements and emphasized the fact that the final decisions are still to be made.

OECD’s timeline to reach an agreement on a consensus-based solution by the end of 2020 is ambitious, as various elemental themes are still under discussions and to be decided. However, given the effort OECD is putting into this project, it would not be surprising if the target was to be met.

We are happy to discuss the topic in more detail so please do not hesitate to contact us.

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