Question: Why should a "non-digital-born" company be concerned about digital tax?
It's a valid question. Many taxpayers that operate in traditional, supply-chain-based business models rightfully tuned out of the Organisation for Economic Co-operation and Development's (OECD's) earliest discussions of digital tax, thinking it was exclusively for "digital-born" taxpayers. However, the scope defining the net of digital tax captured by the "new nexus" has broadened beyond highly digitalized companies to potentially include what we would consider "non-digital-born" organizations that are consumer facing. Simply stated, if your company sells into jurisdictions remotely, either directly or indirectly through a third party, you may trigger what is considered the new nexus.
The OECD, the World Economic Forum, and the World Bank have collectively and independently validated the idea that global economic growth hinges on the integration of digitalization. With limited exception, the essence of digitalization is arguably embedded in a multinational corporation's global value chain. From a macroeconomic perspective, it is easy to align with the famous notion, often attributed to the influential cyberpunk novelist William Gibson, that "the future is already here--it's just not very evenly distributed." (1) There is no debate about the expansive reach of digitalization within the global economy; the challenge ahead for the OECD Secretariat (hereinafter the Secretariat) and the 135 countries that have joined the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (hereinafter the Members) lies within the calibration of the new digital tax framework with the microeconomic reality in which the taxpayer operates as well as the nature of the relevant business model, while preserving the time-tested foundation of transfer pricing: the arm's-length principle.
Under this mandate, the Secretariat released a proposal in October 2019 introducing what is known as the Unified Approach, which blends three distinct options under "Pillar One" (2) in the hope of finding common ground and thus agreement across the Members.
Given the velocity of this project and of economic change, we respect the urgency inherent in finding a balanced, collaborative solution for the Members that would preempt the disruption potentially caused by unilateral measures, as we have seen increasingly in recent weeks. With an aggressive timeline commitment made to the G20, the OECD is expected to expand the depth and guidance around the transfer pricing and treaty implications of digital tax by late 2020.
In this article, we anticipate some of the implications for multisided-platform, digital-born (versus non-digital-born) companies posed by the Unified Approach of Pillar One comprising five "building blocks," namely scope, nexus, profit allocation, elimination of double tax, and dispute prevention and resolution. The following discussion, which is based on Aptis Global's response to the OECD's request for public comments, (3) focuses on three of these elements--scope, nexus, and profit allocation--and addresses certain hurdles to practical implementation as well as theoretical challenges. (4)
The Interpretation and Interaction of Scope and Nexus
Given that the Secretariat has broadened the scope of digital tax under Pillar One to include all "consumer-facing businesses," effectively expanding scope beyond highly digitalized businesses, (5) there are potential issues and questions that may arise for this widened breadth of companies within this new scope, comprising brick-and-mortar, B2B, and B2C companies that bear some element of digital capability within the supply chain.
Based on the premise that the scope for the new taxing rights is defined by a business flow (e.g., tangible, intangible, or service) that is ultimately consumer facing (e.g., directly or indirectly) in the absence...