The tax challenges raised by the Digital Economy have triggered high dynamics in the international tax environment. The recent Organisation for Economic Cooperation and Development (OECD) publications of the proposed Pillar One is a clear example of this global phenomenon. This Pillar aims to allocate new taxing rights on non-routine income (Amount A) to market jurisdictions, even in absence of physical presence (e.g. scale without mass), and fix the amount of routine income connected to certain limited marketing & sales activities (Amount B), via the introduction of a new set of tax rules potentially operating on top of the existing ones.
How can we as PwC help you?
Pillar One could be qualified as a “re-set” of the international tax system, bringing more tax revenue to market jurisdictions. We can help you to assess the possible impact of Pillar One reflecting more and broader taxation rights allocated to the markets. Together, we can navigate the resulting uncertainty and challenges to your business by:
- Understanding, mapping and quantifying the tax implications of Pillar One given your current business model (e.g. centralized vs decentralized, CFB vs ADS, reference industry);
- Tooling based quantification of possible financial tax impact due to the shift of profits to local markets including changes in ETR, cash-flow taxes and estimation of the financial risk of double taxation; and
- Determining the compliance requirements, assessing any possible data / process gaps, setting strategy towards compliance and assisting with implementation.
Want to learn more about what PwC can do for you? Please contact us.
OECD’s Pillar One and Two Blueprint
One of the solutions to address the impact and consequence of the digitalisation of the global economy are the OECD’s Pillar One and Pillar Two blueprints. The OECD released these two blueprints for future concrete solutions on 12 October 2020, after years of research and political debates with various stakeholders, including publications of interim reports and consultations. In particular,
- Pillar One providing an initial framework which combines technical elements from previous proposals (i.e. marketing intangibles, user participation and significant economic presence) and whose scope includes digital companies (ADS) and CFBs. Pillar One recognizes three core components:
- Amount A, which constitutes a new taxing right for market jurisdictions which are allocated a share of a MNE’s residual (non-routine) profit, even without any physical nexus or with low local substance;
- Amount B, triggering a fixed return for certain baseline marketing and distribution activities taking place physically in a market jurisdiction;
- Processes to improve tax certainty through effective dispute prevention and resolution mechanisms.
- Pillar Two which would introduce a global minimum tax addressing the remaining issues linked to base erosion and profit shifting (BEPS 2.0) by MNEs.
Ten relevant Pillar One questions to ask yourself
- Could your business be in scope for the application of Pillar One Amount A (i.e. consumer-facing business or automated digital services (“ADS”))?
- Does your business obtain revenues from ADS activities in market jurisdictions where it currently has no taxable presence?
- Do you have the required insights into your company’s current transfer pricing policies, the income allocation relating to non-routine intangibles and the utilization of Research & Development / Intangible Property / Patent regimes within your group in order to determine the possible non-routine income shift under Amount A?
- Are you able to identify your Group’s “paying entities” in order to determine the financial tax effects of Pillar One’s Amount A and Amount B?
- Is your current arm’s length principle based (non)-physical presence in market jurisdictions (e.g. limited risk distributors, commissionaires, agents, fully fledged distributors, etc.) still strategically and operationally efficient and effective from a business perspective whilst anticipating Pillar One?
- How would Pillar One impact the remuneration agreed upon under your multi- / bi- / unilateral Advance Pricing Agreements?
- What will be the Pillar One financial tax impact of the possible different economic life cycles between your markets given possible cross-subsidization between profitable and less profitable/loss-making markets?
- How will the tax treatment of losses (at group level, paying entity level and “in-market” entity level) under Pillar One impact your group’s financial statements? Have these been recognized and will they continue to be recognized?
- Are you comfortable that you have the required insights on the impact of Pillar One on your group-wide effective tax rate and overall cash tax cost to inform your stakeholders?
- Can you fulfill the main compliance requirements based on your current reporting systems such as having consolidated financial accounts segmented by business lines or clear internal reporting of in-market revenue and income?
We are happy to discuss these questions with you, please feel free to contact us!
Even though the Pillar One Blueprint is still under discussion and its contents may change, the OECD is now committed to publishing a final report, including a draft for legislative implementation by mid-2021. Although wide ranging views on the various design elements of Pillar One have been expressed by various jurisdictions, part of the OECD / G20 Inclusive Framework and other stakeholders, a very clear message has been given to the OECD; the current design of Pillar One is too complex and simplification is required. For a more detailed overview of the public consultation meeting, a summary prepared by PwC Tax Policy Globally, outlining some of the main items discussed as part of the consultation, can be accessed here. We will update you via the web page and our Tax Newsletter.
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PwC’s Market Taxation Analyser (MARTA) tool
To get clear insights into how the OECD two pillars proposal may impact your business, PwC has developed the Market Taxation Analyser (MARTA). This tool uses a combination of publicly available information and your own readily available data, submitted via an Excel based information.
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