Find international consensus for taxing the digital economy, says ICAEW
15 December: ICAEW’s Tax Faculty has urged the OECD to work with its members to agree an approach to the taxation of multinationals to replace the plethora of digital services taxes being introduced unilaterally across the world.
In a response to the OECD’s consultation on its Pillar One and Two proposals, ICAEW’s Tax Faculty has welcomed the delay in finalising the rules until mid-2021 to find a workable solution. However, it urges proactive collaboration with member governments to reduce the incentive for them to adopt unilateral measures which may then be harder to reverse.
Published as ICAEW Rep 113/20, the faculty calls for a roadmap to be published setting out a route to implementation that would make it easier for governments to understand how to adopt domestic legislation in accordance with the agreed multilateral approach.
The faculty also sets out a number of suggestions for simplifying the proposals and a phased approach to help governments and multi-national enterprises (MNEs) transition into the proposals. These include a de-minimis group revenue threshold initially higher than the proposed €750m so that a smaller number of businesses are initially subject to the rules, along with an option to opt into the rules for smaller businesses where it is advantageous for them to do so.
Pillar One sets out proposals for allocating taxation of digital-type services between territories. The faculty recommends that the rules are simplified and aligned more closely to the practices and accounting systems that MNEs already have in place for identifying different types of business activities.
Pillar Two sets a mechanism for ensuring that the revenue generated through certain activities and cross-border transactions suffers at least a set minimum level of taxation.
The faculty suggests restricting the Pillar Two rules to a blacklist of territories and introducing changes that would ensure the proposals do not impact certain sectors unfairly, such as the insurance industry. As the rules seek to tax revenues (rather than profits) based on effective tax rate calculations, this can produce inappropriate outcomes in industries where profit margins are low or where there are significant timing differences between tax and accounting results.
The faculty also sets out a number of changes which would help to simplify the rules and make it easier for businesses to comply with them. This includes alignment with profit reporting requirements currently set out in the country-by-country reporting regime.