OECD agrees on 'unified approach' to taxing multinationals

However that approach is not yet defined.

A group of 137 countries and jurisdictions have been working to address the tax challenges raised by digitalisation, publishing a statement that promises a "unified approach" to dealing with multinational organisations.

The statement [PDF] said the Organisation for Economic Cooperation (OECD) is committed to reaching a "consensus-based long-term solution to the tax challenges arising from the digitalisation of the economy" and that the group will continue working towards an agreement by the end of 2020.

According to the Statement by the Inclusive Framework on BEPS, it puts all members on equal footing for the multilateral negotiation of international tax rules.

See also: Digital tax, trade wars, big tech: what's actually going on between Europe and the US?

To do this, the group decided on a "two-pillar negotiation": One of nexus and profit allocation and another on ensuring a minimum level of taxation.

It was agreed upon that the new rules should be shaped to define where tax should be paid -- known as the nexus -- and on what portion of profits should be taxed -- profit allocation.

The participants said this would ensure that multinationals conducting "sustained and significant" business in places where they may not have a physical presence can be taxed in such jurisdictions.

The nexus for where a company is taxed has historically been the physical location of companies, which allowed tech companies to pay less taxes by basing their offices in jurisdictions with lower tax rates

"It is more urgent than ever that countries address the tax challenges arising from digitalisation of the economy, and the only effective way to do that is to continue advancing toward a consensus-based multilateral solution to overhaul the international tax system," OECD Secretary-General Angel Gurría said.

"We welcome the Inclusive Framework's decision to move forward in this arduous undertaking, but we also recognise that there are technical challenges to developing a workable solution as well as critical policy differences that need to be resolved in the coming months."

Gurría said the OECD would do everything it could to facilitate consensus, saying he was convinced otherwise that failure to reach agreement would "greatly increase the risk that countries will act unilaterally, with negative consequences on an already fragile global economy".

The unified approach outlined is designed to adapt taxing rights by taking into account new businesses models and thereby expand the taxing rights of market jurisdictions.

"This is intended to re-stabilise the international tax system, assisted by enhanced dispute prevention and resolution procedures," the statement explains.

To achieve these results, the approach encompasses three types of taxable profit that could be allocated to a market jurisdiction: Amount A, Amount B, and Amount C.

Amount A is explained as a share of residual profit allocated to market jurisdictions using a formulaic approach applied at a multinational group level.

This new taxing right would apply irrespective of the existence of physical presence, especially for automated digital services.

Amount B is a fixed remuneration based on the "arm's length principle" for defined baseline distribution and marketing functions that take place in the market jurisdiction.

While Amount C covers any additional profit where in-country functions exceed the baseline activity compensated under Amount B. The scope of Amount C is still being considered

The statement follows the group publishing a proposal in October as a result of the G20 in June agreeing to plans to have technology giants such as Facebook and Google pay more taxes.

The proposed changes are an attempt to recognise that the current global economy has become increasingly digitalised, the OECD said, as businesses can now project themselves into the daily lives of consumers without necessarily having a traditional physical presence -- an office -- in the market.

Inclusive Framework members will next meet in July in Berlin, at which time it said a political agreement will be sought on the detailed architecture of pillars one and two.

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