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How is the Digital Tax being dealt with at international level?
29/30 January 2020 Statement by the OECD/G20 Inclusive Framework on BEPS

Paris - February 13, 2020

There are no doubts that the process of seeking an internationally-agreed Digital Tax is one of the “hot topics” in the International Tax arena.

It is well-known that big Tech companies often make huge amounts of profits in jurisdiction where they do not have any physical presence.

Therefore, according to the common international tax rules, according to which the allocation of taxable business profits between different jurisdictions is made on the basis of the physical presence (as per the Permanent Establishment (PE) criterion[1]), these profits avoid taxation.

On 29/30 January 2020, the OECD/G20 Inclusive Framework (IF) on BEPS - which is the project by which over 135 countries and jurisdictions are working to implement the BEPS Actions[2] to counter tax avoidance and implement a better tax environment - published a report[3] that takes stock of the advancement of the working groups on the solutions proposed for an internationally-agreed Digital Tax.

The IF countries are eager to reach a consensus-based solution on the Digital Tax by the end of 2020.

Thus far, the OECD/G20 Inclusive Framework on BEPS has put forward a Two-Pillar approach to the taxation of the digital economy.

Each Pillar contains several propositions aimed at implementing a fairer and more transparent international tax environment and can be summarized as follows:


Pillar One proposes the so-called “Unified Approach” that would deliver a three-tier tax made up of three Taxable Amounts that will be determined as follows:

AMOUNT A - A new taxing right (so called “Amount A”) would be created in favor of jurisdictions where the big tech companies generate income without having any physical presence.

The scope of this taxing right should encompass businesses that provide automated and standardised digital services to a large customer or user base as well as businesses that generate income from selling goods or services, directly or indirectly, to consumers.

In this context,

- Thresholds will be set in order to ensure that the tax is levied on companies that make very high profits on a global basis[4];

- A nexus rule will also be set in order to determine when a MNE[5] has a “significant and sustained engagement” with the market jurisdiction where it operates; this is particularly important since taxable profits under Amount A are neither allocated according to the physical presence criterion nor according to the Arm’s Length Principle (ALP) of Articles 5 - PE - and 7 - Business Profits - of the OECD Model;

- A formula will be agreed upon in order to calculate the portion of profits allocable to the eligible market jurisdiction; this formula will be based on the group’s total profits and not on a per-country basis;

- Measures to counter double taxation deriving from the application of existing international rules[6] as well as from the interactions of the different Amounts (especially between Amount A and C) are still to be defined.

AMOUNT B - Unlike Amount A, the taxable profits allocated under Amount B do not depend on a new taxing right.

Indeed, Amount B is a fixed amount of taxable profits that would be allocated to the jurisdiction where a business has either a subsidiary or a permanent establishment according to the ALP criterion with an aim to standardising the remuneration of local distributors that buy products from related parties for resale and, by this means, perform a pre-determined basic economic activity named “baseline marketing and distribution activity”.

A fixed, taxable profit determined according to the ALP criterion will then constitute Amount B.

Amount B should aim in particular at simplifying the application of transfer pricing rules by improving tax certainty about the pricing of transactions.

AMOUNT C - Like Amount B, these taxable profits do not create any new taxing rights and are determined according to the ALP criterion.

Amount C is aimed at covering any additional profits generated by a MNE in a given country that exceed the fixed return determined according to Amount B criteria.

Like Amount B, the goal of Amount C is mainly to improve tax certainty and simplify dispute resolution when it comes to the allocation of profits between several countries according to the ALP criterion.

The scope of Amount C is still being discussed and it is considered as a critical element for reaching an agreement on Pillar One.


Pillar Two (also referred to as the “GloBE” proposal) is aimed at implementing the remaining Actions of the BEPS project (see footnote 2) and granting countries the right to “tax back” in case other jurisdictions have not exercised their primary taxing rights or taxed MNE’s profits at very low rates.

The main objective of Pillar Two is to have MNEs pay their fair and minimum amount of tax in each country where they generate profits.

The OECD Inclusive Framework is still working on the measures of Pillar Two which are as follows:

A. Income inclusion rule

This rule draws on the functioning of the Controlled Foreign Companies (CFC) rules.

The Income Inclusion rule would require a MNE to include in the taxable income of its parent company any foreing subsidiary’s income that has not been taxed over an internationally-agreed minimum rate.

This rule would then discourage MNEs from allocating income to low-tax countries.

B. Switch-over rule

This rule is aimed at ensuring that the Income Inclusion rule applies also to foreign branches (i.e. permanent establishments) of MNEs which are exempt under double tax treaties.

This rule would apply only where countries have agreed to use the exemption method in their tax treaties.

This rule would make possible for the tax authority of the parent company to turn off the treaty benefit of the exemption of the foreign branch’s income and replace it with a credit method.

The credit method means that the foreign branch’s profits will have to be taken into account in determining the parent company's taxable income when that the branch’s income is subject to an effective tax rate lower than the internationally-agreed minimum rate.

C. Undertaxed Payments rule

Unlike the Income Inclusion rule, the Undertaxed Payments rule would aim at limiting tax treaty benefits by denying deductions or requiring adjustments with regard to intra-group payments when their objective is only to lower the amount of taxable income for the parties involved in the transaction.

D. Subject to tax rule

Under this rule, intra-group payments could be subject to withholding or other taxes at source and treaty benefits like exemption on certain items of income might be denied when the payment is not subject to tax at a minimum, internationally-agreed rate.

Work is still underway on the coordination and compatibility of Pillar Two rules with international obligations such as non-discrimination as well as with EU Law.

The objective of the coordination work is to ensure that double taxation risks are minimized and compliance costs are reduced through simplification measures.


The OECD Working Parties are expected to deliver the proposition of a consensus-based solution on the key issues by July 2020.

A final report is expected by the end of 2020.

Andrea Catasti

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[1] See Articles 5, 7 and 9 of the OECD and UN Model Tax Conventions.

[2] BEPS - Base Erosion and Profit Shifting are tax planning strategies intended to exploit gaps and mismatches in tax rules. The OECD/G20 Inclusive Framework prepared 15 Actions in order to counter this phenomenon on an international basis that costs countries between 100 and 240 billion in lost revenue annually. The Tax Challenges Arising from Digitalisation (Digital Tax) is BEPS Action 1. For more information about the BEPS Actions see :

[3] Statement by the OECD/G20 Inclusive Framework on BEPS on the Two-Pillar Approach to Address the Tax Challenges Arising from the Digitalisation of the Economy - OECD - Paris - January 31st 2020.

[4] It is likely that this threshold will correspond to the 750 M threshold set by BEPS Action 13 provided for Country-by-Country (CbC) reporting.

[5] MultiNational Enterprise.

[6] See Art. 5 - Permanent Establishment and Art. 7 - Business Profits - of the OECD Model. According to these provisions, profits are attributed to permanent establishments of MNEs on the basis of the physical presence and the allocation of profits is made according to the Arm’s Length Principle (ALP), which means that taxable profits can be “adjusted” in case they do not reflect the prices that would be applied if the two enterprises were independent and not related. This way of allocating profits is also called “separate-entity approach”.