The Organisation of Economic Co-operation and Development (OECD) has released a consultation paper proposing changes in the rules for taxing Internet giants such as Facebook, Apple, Google, Netflix, etc.
The proposal is called “Unified Approach” and it will shift the standard of taxation from physical presence to sales in a particular market.
What is OECD?
The Organisation for Economic Co-operation and Development (OECD) is an international economic organisation.
Their goal is to shape policies that foster prosperity, equality, opportunity and well-being for all.
It was founded in 1961 by 18 European nations, and the United States and Canada to stimulate economic progress and world trade.
It now has 36 member countries that are mostly high-income, free-market economies.
Why new taxation laws?
The ongoing global battle over how to tax the digital economy is yet to reach resolution.
As of now, “highly digitalised businesses” can operate remotely and have high profits.
Many companies have moved their source of profits to countries with low tax rates, such as Ireland.
The proposal would give new taxing rights to countries with many users of such business models.
India is among countries that rely on a significant economic presence model.
If the new OECD proposal is accepted, the companies will have to pay more taxes in the markets in which they sell more.
How the new rule will be designed?
The key to the proposal is that the “new nexus” would be based on sales.
“Nexus” in international tax - Refers to the operating presence in a country that makes a company taxable.
The new nexus rule would address this issue by being applicable in all cases where a business has a significant involvement in the economy of a market jurisdiction irrespective of its level of physical presence in that jurisdiction.
The proposal suggests designing the new rule and determining significant involvement in the jurisdiction by assigning a revenue threshold in the market.
It considers a 750-million-Euro revenue threshold.
This would allow the rule to encompass those who enter the market through a distributor.
It also means the rules would apply not just to the large tech multinationals, but any firm with a presence online.
The proposal focuses on large consumer-facing businesses, broadly defined as businesses that,
Generate revenue from supplying consumer products or
Provide digital services that have a consumer facing element.
This definition will be articulated further, but its recommendation exempts resource extraction companies like oil companies.
What’s next?
The proposal leaves many questions unanswered - in particular, how much profit should be reallocated to the country.
The choice of this amount will ultimately be the result of a political agreement that needs to be acceptable to all members of the Inclusive Framework, small and large, developed and developing.
Stakeholders can submit their responses by November 12, 2019.
Officials hope a new tax framework could be agreed upon by early 2020.
G20 finance ministers may discuss this proposal in the near future, and countries in favour of new laws could begin negotiations thereafter.
