July 2023 – 138 countries agree to continue the suspension of Digital Services Taxes for a further year as OECD Pillar negotiations proceed
138 countries on 11 July 2023 committed to a further 12 months to negotiate a global settlement on where around 100 digital services multinationals will be liable to taxes. The initiate, being coordinated by the OECD, is known as Pillar 1. It would enable local taxation of an estimated $2oo billion of international revenues made by the targeted digital service providers.
Doubts remain about the US being willing in Congress to approve the final agreement since it will raise foreign on many of their digital provider companies, a compromise allowing other countries to proceed is emerging. A final text of the agreement will be due in the next few months for ratification to begin by year end.
Five of the 140+ members of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) declined to sign the extension, including Canada, Belarus, Pakistan, Russia and Sri Lanka. Canada’s DST is due to come into effect from 1 January 2024.
See our DST country implementations tracker.
The DST’s already implemented (e.g. UK, France and Italy) are in operation but tax payers will be entitled to offset any taxes paid against future Pillar 1 taxes. Others not implemented, e.g. Belgium, are on hold waiting for Pillar 1 agreement.
Following the freeze, further work on Amount B of Pillar 1 – will start before the end of July with a public consultation, until 1 September – is slated for completion by year-end.
Jan 2023 – OECD launches consultation on ‘Pillar 1’ proposal that aims to end proliferation of controversial Digital Services Tax – details and US opposition doubts remain for 2024 implementation
In December, the OECD issued a discussion document (draft Multilateral Convention) aiming to get back on track its proposed global settlement – Pillar 1 – on taxing the foreign digital revenues of multinationals. It had been hoped in 2021 when 137 countries signed-up to the draft proposals (Inclusive Framework on BEPS) that the new Pillar 1 regime could be in place by January 2023 to replace Digital Services Taxes (DST’s). These taxes, launched by the likes of the UK, France, Italy, India, Canada and more, had been met by trade tariff retaliations by the US which saw them are indiscriminate revenue raisers on their domestic digital giants – Amazon, Apple, Meta, Google etc.
The consultation, focused on ‘Amount A’ of Pillar 1, lasts until 20 January 2023. There will be a mid-2023 Multilateral Convention final document. This will provide the framework for the withdrawal of DST’s, including full definitions of measure countries will abide with.
The new target implementation if January 2024. However, aside from the OECD work, the other main risk remains likely US opposition to the proposals. Discussions on Amount B are more complex with a final deliverable target of Autumn 2023.
OECD consultations on Amount A still may not hold all the answers
The new discussion document from the OECD is attempting to move forward the definition Amount A, which determines how countries may take locally generated digital earnings of companies tax resident abroad. This would therefore remove the need for DST’s. The principles it applies include:
- A tax on foreign companies’s income
- Like VAT, the place of taxation is the home country of the consumer/business customer
- It is not a tax on income under domestic law and so outside of Double Taxation Agreements.
What the documents did not include is a list of what constitutes a DST or “relevant similar measures.”. This leaves open considerable scrutiny and scope to retain DST’s by some countries.
US doubts on ratifying OECD Pillar 1 agreement for 2023 means unilateral DST’s to make a comeback?
The ambitious October 2021 OECD inclusive framework on base erosion and profit shifting (BEPS) agreement by 137 countries on global tax reforms is proving hard work to implement. The attention has been on a 15% global minimum corporate income tax, Pillar 2. But Pillar 1, reallocating rights to countries to tax digital revenues of non-resident companies selling in their countries, looks stuck too with arguments around its own ‘Amount B’ calculation.
The US is unlikely to ratify Pillar 1 soon as most of the companies in scope are American and many questions on tax calculations – Amounts A and B used to estimate taxable income – remain outstanding. The target implementation date of 2023 has now effectively missed. This means that unilateral Digital Services Tax regimes already threatened or implemented will likely make a come-back as a December 2023 moratorium nears. The UK, France, Italy, Turkey, India (Equalisation Levy) and more have already enacted DST’s.
This would retrigger potential retaliatory measures from the US, and potentially China – also a major home to global digital companies. Meanwhile, almost 100 countries have now implemented VAT on foreign digital services.
Pillar 1 – taxing revenues on large, foreign digital services corporates
There has been little progress since October 2021 on the components of Pillar 1 because of the resistance in the US Congress. Pillar 1 is only intended to allow the taxation by foreign jurisdictions of around 100 global digital companies using the following criteria under Amount A:
- Global revenue of €20 billion, with at least €1 billion allocated to the tax jurisdictions looking to raise an assessment (€250m for smaller countries).
- Profit margin of at least 10%.
There is ongoing work on Amount A at the OECD, including a public consultation.
However, there is a second element, Amount B, to Pillar 1. This is centred around transfer pricing simplifications and baseline marketing and distribution calculations for foreign entities . This has largely been neglected since the October 2021 agreement. There is still debate about:
- what should be included in marketing and distribution
- Clarifying routine vs non-routine activities – what is the baseline
Digital Service Taxes comeback as December 2023 moratorium nears
DST’s are a new type of tax developed by countries frustrated by the lack of global tax reform. Many were put on hold at the time of the October 2021 settlement. Others, such as the UK, have come into force, but any revenues will be credited against the eventual Pillar 1 reforms. The signatories to the OECD had agreed to suspend new DST’s until December 2023. In return, the US has committed to not impose punitive trade actions.
Countries such as Canada, Nepal, Paraguay, Kenya and Nigeria have already imposed new DST’s since the October 2021 agreement.
