The international community has agreed on a road map for resolving the tax challenges arising from the digitalisation of the economy, and committed to continue working toward a consensus-based long-term solution within 18 months, the Organization for Economic Cooperation and Development (OECD) has announced.

The 129 members of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) have adopted a Programme of Work laying out a process for reaching a new global agreement for taxing multinational enterprises by the end of 2020.

Rob Mander, Consultant, International Tax Services, RSM: “The OECD’s digital tax roadmap is a welcome step in the right direction. Digital Tax proposals have already been announced or implemented in many countries, so the pressure has been on the OECD to deliver a global outcome that is better than the “go it alone” approach. There also seems to be a recognition from the OECD that the new rules need to apply to all businesses. This is a positive approach. In today’s world, digital is part of most businesses not only those whose primary offering is digital in nature.”

The document was approved during the May 28-29 plenary meeting of the Inclusive Framework, which brought together 289 delegates from 99 member countries and jurisdictions and 10 observer Organisations. It will be presented by OECD Secretary-General Angel Gurría to G20 Finance Ministers for endorsement at their 8-9 June ministerial meeting in Fukuoka, Japan.

“While the roadmap contains some sensible proposals, the road to implementation will not be an easy one. While 129 countries have agreed to the plan in principle, it’s one thing to agree to the work plan and another to agree to the results that are produced. Strong political support is going to be needed for the challenging negotiations ahead, as the revenue requirements and economic drivers differ significantly between countries.

“Foreign Direct Investment (FDI) will likely be the most publicised sticking point, as it has been in the past, as it will disproportionately impact those countries that have relied on tax driven investment incentives. However, the alternative is ‘a race to the bottom’, to lower tax rates to attract investment. Economic growth is going to be critical if countries are going to meet their increasing expenditure requirements and it is encouraging to see this fact recognised in the OECD’s remarks,” added Mander.

The OECD said the Programme of Work will explore the technical issues to be resolved through the two main pillars. The first pillar will explore potential solutions for determining where tax should be paid and on what basis ("nexus"), as well as what portion of profits could or should be taxed in the jurisdictions where clients or users are located ("profit allocation").

The second pillar will explore the design of a system to ensure that multinational enterprises – in the digital economy and beyond – pay a minimum level of tax. This pillar would provide countries with a new tool to protect their tax base from profit shifting to low/no-tax jurisdictions, and is intended to address remaining issues identified by the OECD/G20 BEPS initiative.

In 2015 the OECD estimated revenue losses from BEPS of up to $ 240 billion, equivalent to 10% of global corporate tax revenues, and created the Inclusive Forum to co-ordinate international measures to fight BEPS and improve the international tax rules.

"Important progress has been made through the adoption of this new Programme of Work, but there is still a tremendous amount of work to do as we seek to reach, by the end of 2020, a unified long-term solution to the tax challenges posed by digitalisation of the economy," Mr Gurría said. "Today’s broad agreement on the technical roadmap must be followed by a strong political support toward a solution that maintains, reinforces and improves the international tax system. The health of all our economies depends on it."

The Inclusive Framework agreed that the technical work must be complemented by an impact assessment of how the proposals will affect government revenue, growth and investment. While countries have organised a series of working groups to address the technical issues, they also recognise that political agreement on a comprehensive and unified solution should be reached as soon as possible, ideally before year-end, to ensure adequate time for completion of the work during 2020.

“Whilst their timeline is ambitious, it is driven by necessity, in an effort to stop any additional countries implementing their own digital tax strategies. We have long asked for a unified approach, that offers businesses clarity and minimises reporting requirements across different markets, and look forward to seeing the end result,” concluded RSM’s Mander.