• Pillar One – a prediction

    B.M.R. On

    The G20 Riyadh Summit concluded today. On international taxation, there was (as expected) broad support for the work of the OECD Inclusive Framework.

    The G20 Leaders expect that the work will be concluded (as earlier promised by the OECD) in mid-2021.

    Well, I don’t think this will be achieved. The outstanding technical issues are a big obstacle, moreso as any agreement would require the unanimous approval of the members of the Inclusive Framework.

    As far as digital taxes are concerned, here is my prediction: over the next few months, there will be an increase in unilateral measures to tax digital businesses. Countries that have held back up till now will begin to introduce these new taxes. While many countries had held back, waiting instead for a ‘global solution’ from the OECD Inclusive Framework, there is an understandable impatience in the air. Countries don’t want to miss out on tax revenues, and the recent delay (by the Inclusive Framework) is already prompting some countries to introduce their own measures. In this, they would be joining those other countries that had earlier on decided not to sit back and wait for a global solution, but rather to introduce their own rules in the meantime.

    And this will, of course, lead to double, and even multiple, taxation across jurisdictions. Eventually, countries will negotiate bilateral agreements to reduce or eliminate this double taxation.

    This is most likely how the digital taxes issue will be resolved. We will also likely see common features emerge in the various unilateral digital taxes being introduced, making it easier for there to be standard treaty provisions for double tax relief.

    This ‘organic’ approach will render Pillar 1 redundant. The combination of unilateral (taxing) measures and treaty provisions (for double tax relief) will see to that.

    I think this is the way that things will go. I would be very surprised if Pillar 1 ever saw the light of day as a concrete plan.

    And as for my prediction for Pillar 2, I’ll leave that for another blog post.

  • Article 12B gets green light

    B.M.R. On

    The UN Tax Committee has reached a decision: the proposed Article 12B (on the taxation of income from automated digital services) will be included in the UN Model Tax Convention.

    I remain doubtful whether this provision will actually make it into any real-life tax treaties, especially those treaties that matter where such income is concerned. For example, the United States (typically the residence state for the largest digital businesses) is unlikely ever to agree to such a provision in its tax treaties.

    Also, the provision can only have proper effect if the treaty partners actually have domestic legislation taxing this income. The treaty itself cannot give a right to tax if such income is not taxable in the jurisdiction of the treaty partners.

    And even if the treaty partners do have domestic laws taxing ‘digital income’, it depends further on the particular type of tax regime in place. This Model treaty provision applies only to ‘payments’ for automated digital services. As such, it won’t affect taxing rights that apply where a payment has not been made. For example, where the country levies a tax on the ‘value created’ (within its jurisdiction) by the non-resident company, even if there has been no actual ‘payment’ (from its jurisdiction) to that company.

    Still, considering the slow progress over at the OECD, one must not quibble over this development. It’s a start. Although one does rather wonder at the point of including (in a Model treaty) a provision that has scant likelihood of ever being used.

  • Inclusive Framework Blueprints – the main points

    B.M.R. On

    Last week, the OECD published the blueprints for both Pillar 1 and Pillar 2. Of course, as curious as we all are, not everyone is keen on wading through hundreds of pages.

    And who can blame them? Anyway, here’s some good news. The good folks at TaxSutra have performed an almighty public service. For Pillar One, at least. They’ve put together a useful highlights document, setting out the main takeaways. You can access it here.

    I haven’t seen something similar for Pillar Two. Must be there somewhere. If not, I might have to create it myself.