OECD Blueprint: Redistributing to the rich countries

Calculating taxes (photo credit: INGIMAGE)
Calculating taxes
(photo credit: INGIMAGE)
The OECD and G20, supported by 136 countries, have just published proposals that would largely shift offshore profits from rich US tech companies to rich countries. Robin Hood would not be impressed. Everyone in e-commerce should take note. Read on.
The proposals claim to be “Addressing the Tax Challenges Arising from Digitalization of the Economy.” The main challenge is that nowadays companies often don’t need any physical presence in a country to promote sales. Instead, consumers buy products on the Internet from a server located offshore. Or they use apps and email services “free of charge.”
Nothing is free, of course. Data about consumers is sold to international advertisers. But insufficient tax currently gets collected in the countries where the consumers or users are located – such as Europe and Asia, Israel included – so a lot of corporate profits have been legally piling up offshore.
Therefore, the OECD has come to the rescue of such countries with its latest draft blueprints for reform, and which aim to rake in extra taxes of $100 billion annually. The proposals are grouped under two “pillars.” Are they pillars of respectability?
The pillar blueprint proposals
Pillar 1 proposes to allocate profits according to formulas to the “market” country where revenues/consumers/users are. Two amounts would be allocated by multinational groups to such countries, amounts A and B.
Amount A might perhaps be 20% of residual (=excess offshore) profits exceeding 10% of sales turnover, for groups with global turnover above €750 million (to be decided). But amount A would only relate to profits from: 1) automated digital services, and 2) consumer-facing businesses. Detailed definitions would apply.
Amount B might perhaps be a fixed “transactional net margin” (=cost plus) on “baseline marketing and distribution costs” that would vary depending on industry and region, with no minimum threshold.
Pillar 2 proposes to impose a home-country top-up tax on multinational parent corporations with global turnover above €750m. Perhaps there will be a 12.5% minimum tax on income from each market country after excluding 10% of payroll and depreciation expenses. This is referred to as an Income Inclusion Rule (IIR). There would be a foreign tax credit. And to stop shenanigans with expenses, there would be a back-up tax on under-taxed payments.
None of the above is final yet.
The US and Israel
Pillar 2 is similar in concept to the US GILTI tax (global intangible low-taxed income regime).
Unfortunately, the US GILTI catches US investors in Israeli privileged enterprises – Israeli tax breaks trigger US tax instead.
Fortunately, the OECD pillar 2 might let non-US investors off the hook where the Israeli privileged enterprise has substantive activities, within limits.
The proposals may help hard-up governments finance COVID-19 support measures.
It is uncertain whether the proposals will ever get off the ground. Currently, 136 countries support the proposals, only one opposes them, but that country is the USA. So political negotiations are continuing.
The OECD assumes it may take until mid- 2021 to reach political agreement. Many countries can’t wait that long and may jump the gun with their own digital service taxes – including the UK, France, Spain and India. The Trump administration has threatened massive customs-duty retaliation.
The US has also shown chutzpah by demanding that the pillar rules merely be an optional “safe harbor” for multinational corporations. It might be sorry: This encourages tax audits of those multinationals, a process that has already begun in Israel and elsewhere.
The pillar proposals claim to be simple, but they run to 500 pages, and it is assumed many Third-World countries will give up.
The starting point would generally be consolidated financial statements, and losses may be utilized or carried forward to future years. But the many steps for allocating profit between countries will be challenging.
The proposals claim to address double taxation with foreign tax credits, but the OECD apparently forgot triple taxation: VAT and sales taxes on e-commerce generally cannot be credited against income tax.
What about e-commerce?
E-commerce is the answer to unemployment caused by COVID-19 and a way of boosting most businesses.
Large e-commerce operators should evaluate and plan their likely “Pillar” position.
E-commerce of any size should note the tax clouds on the horizon. Earlier OECD income tax initiatives, EU VAT directives and the US Wayfair Supreme Court sales tax case, already target large and small international operators and are starting to bite.
If no action is taken, there is a risk of multiple taxation. With appropriate planning, you can keep far more while expanding sales internationally over the Internet.
As always, consult experienced tax advisers in each country at an early stage in specific cases.
The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd. [email protected]