The Organisation for Economic Co-operation and Development (OECD) on 29 January released a press release and Policy Note in relation to its work on Addressing the Tax Challenges of the Digitalisation of the Economy. The policy note confirms that a two-pillar approach will be pursued in developing comprehensive changes to international tax policy.

The Policy Note states that there is now agreement among the 127-jurisdiction strong Inclusive Framework on Base Erosion and Profit Shifting (BEPS) to examine proposals involving two pillars which could form the basis for consensus. The first pillar addresses the broader challenges of the digitalized economy and focuses on the allocation of taxing rights among countries, including nexus issues. The second pillar would address remaining BEPS issues. The OECD believes that a two-pillar approach would be effective in recognizing that the digitalization of the economy is pervasive, raises broader issues, and is most evident in, but not limited to, highly digitalized businesses.

In terms of a timeline, a more detailed but still high-level consultation document is expected to be released in February, prior to a public consultation on 13-14 March in Paris as part of the meeting of the Task Force on the Digital Economy, which will be co-chaired by United States (US) Treasury Deputy International Tax Counsel Brian Jenn. An update is expected to be presented to the G20 during the 8-9 June finance ministers meeting in Japan. The OECD is aiming for “reaching a consensus-based, long-term solution in 2020.”¹

The OECD on 29 January also released Harmful Tax Practices – 2018 Progress Report on Preferential Regimes (the 2018 Progress Report), approved by the Inclusive Framework on BEPS which held a meeting last week.² The purpose of this document is to provide an update to the 2017 Progress Report and to report the results of the review of all Inclusive Framework members’ preferential tax regimes that have been identified.

In a related development, US Senate Finance Committee Chairman Chuck Grassley and ranking member Ron Wyden sent a 29 January letter to Treasury Secretary Steven Mnuchin, reiterating US concerns over unilateral action by some European countries to enact some form of digital services tax. The Senate tax leaders described those efforts as “designed to discriminate against U.S.-based multinational companies.” The letter was also sent to the European Council and the European Commission.

Separately, congressional Democrats reportedly are considering using tax technical corrections as leverage to broker a legislative deal that includes more generous tax incentives, such as the child tax credit and the earned income credit. According to press reports, Democrats are not planning to use the draft technical corrections legislation that was released by ranking House Ways and Means Committee minority member Kevin Brady in early January as a starting point, given it was drafted without their input. It is unclear when House Democrats may introduce legislation.

Endnotes

1. See EY Global Tax Alert, OECD’s new insights describe growing support on comprehensive changes to international tax policy, beyond digital, dated 29 January 2019.

2. See EY Global Tax Alert, OECD releases 2018 Progress Report on Preferential Regimes under BEPS Action 5, dated 30 January 2019.

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP, International Tax Services, Washington, DC

• Arlene Fitzpatrick | arlene.fitzpatrick@ey.com
• Joshua Ruland | joshua.ruland@ey.com  

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