October 10, 2019
Anna Murray
Current practices in global taxation are based on principles originated from the 1920s. The existing tax rules are mainly dependent on taxpayers’ physical presence in their market jurisdiction. But, there are growing concerns of the permanent establishment are no longer appropriate for companies doing multinational business.
Nowadays international tax standards are arranged by the Organization for Economic Cooperation and Development (OECD). In accordance, the world requires a new nexus rule from the OECD that will set up a cross-border tax system to allow governments to levy multinationals doing business in their countries. Earlier this year more than 130 countries and territories agreed to a rewriting of tax rules and tasked the OECD to come up with proposals.
Thus, the OECD published October 9 a public-policy forum on residual profits in its digital tax report. It is a consultation document of proposals to resolve a new taxation model. In the future, tax havens like British overseas territories, Ireland, Luxembourg, and the Netherlands will not undermine the global tax system in tandem with multinationals under the new nexus rule.
According to the Director of the Center for Tax Policy and Administration at the OECD, Pascal Saint-Amans, the OECD has put forward a sketch of a blueprint of a new architecture. the proposals are aiming to reallocate taxing rights in favor of the market jurisdiction, including the crucial distinction between residual and routine profits. In addition, the OECD hopes to stabilize the international tax system with mandatory binding arbitration, and effective dispute prevention and resolution mechanisms as well.
France has passed a digital services tax of a 3% tax on French sales for a group of 30 tech companies including Amazon, Facebook, and Google. The UK also has a similar 2% tax installed in October 2018 and soon will come into effect in 2020. The OECD will submit the proposals to the G20 finance ministers on October 17 to start discussions of the unified approach and negotiate a new tax system within the year 2020.
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