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Tax
Tax developments in the digital economy
By Gavin Gafan, Senior Tax Manager and Vickram Khatwani, Associate Director Tax, Deloitte Limited
In 2019 Gibraltar joined the Organisation for Economic Cooperation and Development (OECD) Inclusive Framework (the ‘Inclusive Framework’) on Base Erosion and Profit Shifting (BEPS). The OECD’s BEPS Project, sponsored by the G20, sets out to create a set of international tax rules to address base erosion and profit shifting, thus aiming to protect tax bases of jurisdictions while offering increased certainty to taxpayers. Back in 2013, the strategy behind BEPS was set out in a 15-point Action Plan to address base erosion and profit shifting along three key areas, being the introduction of coherence in domestic rules that affect cross-border activities, the reinforcement of substance requirements in existing international standards, and the improvement of transparency as well as certainty. Since the release of the BEPS Action 1
Report in 2015, addressing the tax challenges raised by the digital economy has been one of the main priorities of the Inclusive Framework.
To this effect, in 2019, member countries of the Inclusive Framework agreed to assess proposals to address the challenges arising from digitalisation in the form of two pillars:
l Pillar One addresses the allocation of taxing rights between jurisdictions and considers several proposals for new profit allocation and taxable presence (nexus) rules.
l Pillar Two proposes a set of interlocking international tax rules designed to ensure that large multinational businesses pay a minimum level of tax on all profits in all countries.
In October 2020, two detailed ‘Blueprints’ on these pillars were released in relation to the ongoing work by the OECD however these are currently still undergoing review. A summary of Pillar One follows.
Pillar One
Pillar One seeks to achieve a global consensus for new businesses through the adaptation of current rules for allocating taxing rights and nexus rules applicable to business profits. The goal is to expand the taxing rights of market jurisdictions where businesses have active and sustained presence in the economy through activities carried out within, or remotely directed at, said jurisdictions.
Pillar One also seeks to improve tax certainty through the introduction of mechanisms on dispute prevention and resolution.
To achieve these objectives, Pillar One contains three components:
(i) a proposed new taxing right allocating a share of global residual group profit to market jurisdictions using a formula-based approach, irrespective of local physical presence in said jurisdictions (Amount A);
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