OECDreleases preliminary results of economic and impact assessment analysis ontwo-pillar proposal towards taxing digital economy
On 13 February 2020, the OECD presenteda number of preliminary, high-level results on the economic and impactassessment analysis undertaken with respect to the implementation of thetwo-pillar approach towards addressing the tax challenges of the digitaleconomy (for further details on the two-pillar approach, see OECD-1, News 31January 2020).
The main purpose of the analysis is toinform ongoing discussions and, ultimately, key decisions on the design andparameters of the Pillar One and Pillar Two approach, to be taken by members ofthe Inclusive Framework on Base Erosion and Profit Shifting (BEPS) in theirnegotiations towards adopting a consensus-based solution to the tax challengesarising from digitalization. The analysis has been based on illustrativeassumptions that do not pre-judge decisions of the Inclusive Framework on BEPS,and has a broad geographic and company coverage including more than 200jurisdictions, comprising all members of the Inclusive Framework on BEPS and alarge number of developing countries, and more than 27,000 multinationalgroups. The analysis has taken into account data from a range of sources,combining data at firm level with aggregate data, and incorporates results atglobal and jurisdictional levels, taking into consideration high-income,middle-income and low-income jurisdictions and investment hubs. Nocountry-specific results have been presented as part of the preliminaryanalysis.
Thepreliminary findings on the combined overall impact of Pillar One and PillarTwo are as follows:
–the global net tax revenuegains are estimated to be up to 4% of the global corporate income tax (CIT)revenues, or USD 100 billion on an annual basis, depending on the reformdesign;
–the CIT revenue gains arebroadly similar across high-income, middle-income and low-income economies; and
–a significant reduction inprofit shifting is expected from the combined effect of the Pillar One andPillar Two reforms.
More specifically, the Pillar Onereform is expected to change the way jurisdictions allocate taxing rights amongeach other and carve up the "tax pie". However, Pillar One would leadto only a slight increase in global tax revenues as taxing rights would shiftfrom low-tax to higher tax jurisdictions. At a jurisdictional level, mosteconomies would experience slight CIT revenue gains, with low-income andmiddle-income economies gaining relatively more CIT revenue gains thanhigh-income economies, whereas investment hubs would experience a slight CITrevenue loss.
On the other hand, it is anticipatedthat the Pillar Two reform will contribute to a significant increase inadditional tax revenues across jurisdictions, depending upon the rate and thefinal design agreed. Furthermore, Pillar Two is expected to reduce profitshifting by eliminating tax rate differentials between jurisdictions andadversely affecting profit shifting incentives of multinational groups.Decrease in profit shifting would mainly benefit developing countries, as thosetend to be more negatively impacted by the profit shifting strategies ofmultinational groups.
Finally, the analysis indicates thatthe expected direct effect of the Pillar One and Pillar Two reforms oninvestment costs would be small in most countries with many firms beingcompletely unaffected by the reforms. Notwithstanding that, it is anticipatedthat the Pillar One and Pillar Two reforms will decrease the influence thattaxes have on investment location decision-making and contribute to moreinvestments being driven by other factors, such as infrastructure and labourcosts, leading to global growth.
In its statement on the two-pillarapproach towards addressing the tax challenges arising from the digitalizationof the economy, the Inclusive Framework on BEPS welcomes the good progress onthe economic and impact assessment analysis of the Pillar One and Pillar Twoproposals and highlights the fact that failure to reach a consensus-basedsolution to the tax challenges arising from digitalization would lead to morecountries adopting unilateral tax measures and, thus, greater uncertainty fortaxpayers and tax administrations. Also, Inclusive Framework on BEPS calls forcontinued efforts towards strengthening the analysis with caution due to datalimitations, and for a more detailed analysis on the investment and growthimpacts of the Pillar One and Pillar Two proposals before the end of March2020.
Media queries should be directed toPascal Saint-Amans, Director of the OECD Centre for Tax Policy andAdministration or Lawrence Speer in the OECD Media Office.