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The newly released OECD game plan aiming for a consensus solution in 2020 on the tax challenges of digitalization and further work towards preventing base erosion calls for addressing the issue in part through an inclusion rule that could resemble the US global intangible low-taxed income (GILTI) enacted under the Tax Cuts and Jobs Act (TCJA), but could be more like a minimum tax on foreign-source earnings.

The inclusion rule is called for as part of the second of two pillars of the overall plan, which seeks to strengthen the ability of jurisdictions to tax profits afforded a low effective tax rate by other jurisdictions. A tax on base eroding payments is also envisioned as a backstop to the minimum tax. In conjunction with the January 29 release of the policy note, which followed the OECD/G20 Inclusive Framework on BEPS January 23-24 meeting, OECD officials confirmed that they are considering a GILTI-like tax that draws on the experience of the 2017 US tax reform. The policy note itself said options under consideration reflect both remaining BEPS challenges and more recent developments such as US tax reform.

Treasury and key House and Senate tax writers had resisted previous European proposals for new taxes on digital companies as unfairly targeting US businesses officials, but Treasury officials have stated publicly that since early 2018 they have been engaging in talks for a broader proposal and have welcomed the global interest in a proposal consistent with the TCJA. Lafayette G. "Chip" Harter III, Treasury Deputy Assistant Secretary for International Tax Affairs, acknowledged during a conference January 29 that a lot of technical work will have to go into how to apply a minimum tax on a multilateral basis. The policy note acknowledges that the absence of a multilateral approach poses the risk of uncoordinated action by individual countries. OECD officials have observed that the United States may have more of an interest in protecting the US tax base following enactment of the TCJA.

The first pillar of the plan described in the note will focus on how the existing rules that divide up the right to tax the income of multinational enterprises among jurisdictions, including traditional transfer-pricing rules and the arm's length principle, can be changed to allocate more taxing rights to jurisdictions where value is created by user participation. The note said issues of profit attribution and nexus need to be developed contemporaneously, and changes to the permanent establishment threshold, such as the concept of "significant economic presence," are possible. The policy debate within the OECD is framed by the very targeted laws some countries have adopted solely aimed at digital companies, and much broader proposals that might be viewed as formulary apportionment systems. The middle ground, as discussed by US Treasury officials, would focus on so-called excess or residual returns from market intangibles, and developing a way to allow "user" countries where a company may not have physical presence to capture some of that revenue.

The Inclusive Framework, which goes beyond the 36 members of the OECD to pull in over 115 countries and jurisdictions, will work to balance accuracy and simplicity, and recognizes a solution may affect a wider group of businesses beyond digital, such as those with marketing intangible profits but limited risk distribution structures in market jurisdictions, the note said.

"Countries have agreed to explore potential solutions that would update fundamental tax principles for a twenty-first century economy, when firms can be heavily involved in the economic life of different jurisdictions without any significant physical presence and where new and often intangible drivers of value become more and more important," said Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration. "In addition, the features of the digitalised economy exacerbate risks, enabling structures that shift profits to entities that escape taxation or are taxed at only very low rates."

Saint-Amans noted that a key element of any proposal will be to prevent double taxation. There has been discussion of including as part of the GILTI-like minimum tax a "defensive measure" that might apply to disallow certain deductions for cross-border payments to related parties if a company is not subject to a minimum tax regime. One of the complaints taxpayers have expressed in regards to both the GILTI regime and the US base erosion and anti-abuse tax is that there are no mechanisms to prevent double taxation.

In terms of a timeline, a more detailed but still high-level consultation document is expected to be released prior to a public consultation March 13-14 in Paris as part of the meeting of the Task Force on the Digital Economy, which is co-chaired by U.S. Treasury Deputy International Tax Counsel Brian Jenn. An update is expected to be presented to the G20 during 2019 during the June 8-9 finance ministers meeting in Japan. OECD is aiming for "reaching a consensus-based, long-term solution in 2020."

The OECD "Addressing the Tax Challenges of the Digitalisation of the Economy — Policy Note" is available here.

A press release is available here.

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