The OECD proposes sharing multinationals’ taxes

On 9 October 2019, the OECD Secretariat published a consultation document with a proposal for a “unified approach” to reform the taxation of large multinationals. It is the first pillar of work being carried out by 134 countries of the so-called inclusive framework, with the aim of agreeing a global solution before the end of 2020. Interested parties may send comments until 12 November.

The central idea is that countries where a company has customers or users could tax part of its profit, even if the company has no physical establishment there. The approach would apply to automated digital services and to consumer-facing businesses, and would rely on a new connection criterion with the territory that would not depend on physical presence. It forms part of a two-pillar work programme: the second, on a global minimum tax, would be developed separately.

What is to be resolved

The current international system was born in the twentieth century, when a company could only sell in another country if it had a factory, an office or staff there. Today a group can offer services to millions of users in a country without establishing itself. The result is that profit is taxed where the company chooses to locate it, and not necessarily where the customers are, which annoys many governments.

This frustration explains the unilateral levies that some countries, such as France, have begun to apply to digital services, and the reaction of the United States. The OECD proposal aims to offer a common alternative and to prevent each country from legislating on its own, with the risk of double taxation and trade conflicts.

How it would work

The document proposes that part of the profit of the groups affected, calculated with a formula rather than the traditional analysis of each transaction, be shared among the market countries. The rest of the profit would continue to be taxed under current rules. A major technical challenge is determining which groups are in scope, what part of profit is reallocated and how double taxation is avoided. There are also discussions on which activities are included: the document mentions automated digital services and consumer-facing businesses, but leaves pending details that will be decisive.

All of these are open questions. The proposal does not yet include final figures or thresholds, and it faces objections from countries with different positions: those hosting large platforms, those that are mainly markets and the smaller ones. An agreement in 2020 is possible, but not guaranteed. Other jurisdictions fear that the new allocation will reduce their tax revenue, above all if they host large groups, which is why the negotiation is difficult.

What to review

For a company or family group with international activity, the prudent course is to follow the process without changing structures in advance. It mainly affects very large groups, but the debate on where distance sales are taxed also concerns medium-sized companies that sell online to other countries.

Review how transfer prices between group companies are documented and keep up to date the information on where profit is generated. If your activity is cross-border, consult your tax adviser to assess the potential impact and prepare without making hasty decisions. Following the process does not mean acting: it means anticipating what information may be requested and keeping sales data by country in order.

International taxation is being rewritten, and it is worth knowing the draft before it becomes law.

This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.