The OECD has published a new draft international treaty as part of its ongoing efforts to reform some of the tax rules applicable to multinationals, particularly those operating in the digital economy. The new treaty falls under the umbrella of an OECD initiative known as “Pillar One”.
In general terms, Pillar One seeks to reallocate taxing rights over certain large multinational entity (MNE) group profits to “market” jurisdictions where revenue is sourced (regardless of the MNE’s physical presence in that jurisdiction). As they apply to tech groups, the rules would therefore have an overlapping effect with some “digital services taxes” - and for this reason the treaty also seeks to prohibit the imposition of such taxes.
Application of the rules
Although on their face the Pillar One rules would apply to all MNEs, only the largest and most profitable MNEs would be in scope: those with global revenue of over €20 billion (reducing to €10 billion over time) and total profits greater than 10 per cent. of their global revenue. Certain exclusions would also apply (e.g. for regulated financial services, defence, etc.).
Taken together, these parameters mean the tech sector is likely to be one of those most affected by the rules. That said, whether particular operators in the tech sector would be positively or negatively affected (in terms of their overall tax burden) is unclear: detailed modelling will be required to weigh up the effect of the new taxing rights against the effect of the removal of digital services taxes.
For the treaty to enter into force, it needs to be ratified by at least 30 jurisdictions including the jurisdictions in which at least 60% of the MNEs initially expected to be within scope have their headquarters (determined via a “points” system).
In practical terms, the 60% threshold means the decision of the US over whether not to ratify will be decisive. This, therefore, remains the key known unknown. The US Treasury has opened a 60-day public consultation and MNEs and advisers alike will be waiting with interest to see the outcome of that process.
Otherwise, it is worth noting that the treaty has as yet only been published in draft form (and is not yet open for signature). This is likely because, as explained by the OECD, different views from a “small number of jurisdictions” on a “handful of specific items” remain. Again, we wait to see how these differences of opinion are resolved.
Overall, the OECD has clearly made significant progress with its Pillar One proposals, but the process is not over yet. Operators in the tech sector should, however, begin considering how they would be affected if the rules are introduced - and feed into the US Treasury consultation as appropriate.