Global menu

Our global pages


Taxing the Digital Economy – Are we nearly there yet?

  • United Kingdom
  • Tax planning and consultancy - Digital tax



On 31 January 2020, the OECD issued a further update on its work on the taxation of the digital economy. The catchily titled “Statement by the OECD/G20 Inclusive Framework on BEPS on the Two-Pillar Approach to Address the Tax Challenges Arising from the Digitalisation of the Economy" (the “Statement”) builds upon previous policy notes (read our previous briefing on this) and programme of work documents issued by the OECD as part of its work to seek a consensus approach to taxing the digital economy.

The Statement focuses on the current thinking of the Inclusive Framework (“IF”) regarding what has been termed the “Unified Approach” to the Pillar One aspects of their work – broadly looking at new nexus and profit allocation rules to enhance the taxing rights of consumer and user jurisdictions. There is relatively little commentary on Pillar Two (the global minimum tax proposals) and it is clear that the work of the IF is less developed in this area.

In typical OECD style, the Statement is dense, wordy and at times repetitive, so set out below is a summary of the key developments since the issue of the public consultation document on the Unified Approach in October 2019. This assumes a basic understanding of the original Unified Approach proposal, which is summarised in our previous briefing on the consultation document.

Pillar One – an update on the Unified Approach

By way of a brief overview, the Unified Approach proposes three types of taxable profit that may be allocated to a market jurisdiction:

Amount A - a new taxing right that allocates a share of residual profit of a multinational group (“MNE”) to a market jurisdiction by reference to active and sustained participation in that jurisdiction. This taxing right would not be determined by physical presence and therefore creates a new remote, digital nexus in market jurisdictions for tax purposes, a significant change to current international tax rules;

Amount B - this gives a fixed remuneration for baseline distribution and marketing functions that take place in a market jurisdiction. This Amount will be based on traditional arm’s length principles (“ALP”), but it is hoped that fixing the remuneration level will give greater tax certainty and reduce tax disputes. It should be noted that Amount B is not intended to create a new taxing right, only change the basis for calculation of profit where nexus with a market jurisdiction already exists under existing international tax rules;

Amount C - this covers any additional profit that should be allocated to a market jurisdiction due to the in-country functions exceeding the baseline activity compensated under Amount B. Again, Amount C is not a new taxing right but a method for a market jurisdiction to increase its profit allocation where the new Amount B fixed remuneration does not adequately reflect the facts.

Following feedback from the consultation and further work by the IF, the Statement includes additional details on these different profit types, their interaction and the important issues of maximising administrative simplicity, obtaining tax certainty, avoiding double taxation and preventing or efficiently resolving disputes.

Amount A


The Statement provides some further detail on the potential scope of application of the new Amount A taxing right:

Businesses within scope

The Statement specifies two broad business groups that are intended to fall within the scope of Amount A:

“Automated digital services”

  • These are described as services provided on a standardised basis to a large population of customers and users, usually remotely with little or no local infrastructure. Examples given are:
    • online search engines
    • social media platforms
    • online intermediation/marketplace platforms
    • online content streaming
    • online gaming
    • online computing services
    • online advertising services
  • It is however suggested that there could be a distinction from online services that involve a high degree of human intervention and judgement e.g. professional services such as legal, accounting, architectural, engineering, consulting etc.

“Consumer-facing businesses”

  • These are described as businesses that generate revenue from sales of goods and services of a type commonly sold to consumers, i.e. individuals for personal use, not for commercial or professional purposes.
  • It is proposed that the rules would also apply to indirect sales to consumers (i.e. through resellers and intermediaries).
  • However, intermediate product/component sales that are to be incorporated into consumer goods should be out of scope unless branded and commonly acquired by consumers for personal use.
  • Example business types given are:
    • licencing revenue from trademarks/brands/franchise in scope
    • personal computing products
    • clothes, toiletries, cosmetics, luxury goods
    • branded foods and refreshments
    • franchise models
    • automobiles

COMMENT – The in-scope business definition is now more detailed and a distinction is being more clearly drawn between highly digitalised businesses and more conventional consumer-facing businesses operating digitally. This becomes important when considering the nexus tests (see below) and potentially enables other segregation between the business types and the opportunity to more aggressively target the highly digitalised business who, for some, have always been the principal target of these rules. The Statement does not address the treatment of MNEs that perform both automated digital and consumer-facing business activities.

Excluded businesses and sectors

  • Extractives - as previously indicated, it is proposed that extractive industries and other producers/sellers of raw materials/commodities will be excluded.
  • Financial services – it is proposed that most of the activities of the financial sector will be excluded, either because these are supplies to commercial customers or because regulatory requirements would typically give rise to adequate nexus in a market jurisdiction for tax purposes. However, it is noted that non-regulated retail financial services could be within scope – for example, digital peer to peer lending.
  • Shipping and aircraft businesses – it is proposed that these should be excluded on the basis that most bilateral tax treaties already specifically address the profits of these businesses.

Thresholds and de minimis amounts

There have been some helpful developments regarding the application of certain thresholds and de minimis profit amounts to limit the scope of Amount A and therefore the compliance and administrative burden.

  • Gross revenue threshold – To limit the burden for smaller MNEs, it is proposed that only groups with a certain level of gross revenue on a group basis will be required to apply the new Amount A taxing right. The EUR750m gross revenue test applied for country-by-country reporting is suggested as a potential threshold.
  • In-scope revenues threshold – Even if gross revenue threshold is met, it is proposed that MNEs should only apply Amount A if the in-scope revenues exceeds a certain threshold. No figure is specified for this threshold.
  • De minimis Amount A profits – It is suggested that if the total profit to be allocated under Amount A does not exceed an agreed de minimis threshold, there should be no requirement to allocate and account for tax on this profit.

Decision tree

A helpful decision tree to determine whether an MNE would be within the scope of the Amount A taxing right has been included at Annex B to the Statement.

COMMENT – The additional detail on thresholds and de minimis limits are a welcome development and should limit the application and scope of new rules for many taxpayers. However, such taxpayers will not completely escape the burden of the new tax rules as it will still be necessary for businesses to determine whether or not these threshold and de minimis amounts are met on an ongoing basis.


The Statement includes the following key points on nexus:

  • The new nexus (taxable presence) rules will be based on indicators of a significant and sustained engagement with market jurisdictions.
  • In-scope revenue generated in a market jurisdiction over a period of years will be used as primary evidence of nexus, applying a threshold relevant to the size of the market as well as an absolute minimum amount to operate as another de minimis threshold.
  • It is proposed that the nexus thresholds will be different depending upon the business categorisation:
    • Automated digital businesses – it is proposed that the revenue threshold will be the only test to establish nexus.
    • Consumer-facing businesses – it is intended that no new nexus should arise if a business is merely selling consumer goods in a market jurisdiction without sustained interaction with the market. The other factors required for such businesses to create nexus are still to be explored, but may include physical presence or targeted advertising.

COMMENT – The split of nexus rules between business types appears to refocus Pillar One primarily on highly digitalised business models. This is likely to be an unattractive development to some jurisdictions. Much will depend on the additional nexus factors applied to consumer facing businesses and how much of an additional bar to achieving nexus these create.

Quantifying Amount A

The Statement includes the following key points regarding the quantification of Amount A:

The tax base

  • It is proposed that the calculation of Amount A will be based on the profits of an MNE, derived from its consolidated financial statements. It is recognised that it will be necessary to harmonise different accounting standards, but it is expected that adjustments will be minimal and limited to material items.
  • It is expected that profits before tax will be the preferred profit measure for the computation of Amount A.
  • It is also stated that losses will be taken into account as well as profits and should be able to be carried forward against future periods.


  • It is suggested that it may be necessary to split large businesses into different business lines or regions and apply the Amount A calculations separately.
  • However, there appears to be some uncertainty about the viability of such segmentation and this is clearly an area that requires more consideration. It is acknowledged that parties to consultation have requested that any segmentation requirements must balance the need for simplicity against accuracy.

Profit allocation keys

  • This is an important area where it is clear further work is required.
  • The basis for the profit allocation key will be sales of a type that generate nexus (as discussed above).
  • It is also noted that there will need to be specific sourcing rules to address scenarios where revenue arises outside of a jurisdiction but is referable to a market jurisdiction e.g. online advertising revenue

Elimination of double taxation

  • The Statement discusses some of the challenges with ensuring that these new taxing rights do not result in double taxation. The following key points are raised:
  • It is recognised that Amount A will operate as an overlay to existing ALP allocation rules and that this could result in double taxation.
  • It is also recognised that the existing bilateral double tax treaty network that currently address double taxation may not be effective in relation to these new tax rights, both because:
    • Amount A does not allocate profit by reference to a specific transaction or entity, and therefore treaty mechanisms such as credits/exemptions and corresponding adjustments cannot easily be applied;
    • there may not be applicable double tax treaties between relevant jurisdictions.
  • It is acknowledged that further work is required on this. The focus of this work appears to be on the design of the Amount A taxing right in order to prevent double taxation arising, but there will also need to be an effective solution for any double taxation that does arise.

Amount B

The objective of Amount B is to standardise the remuneration for distributors located in market jurisdictions (whether subsidiaries or permanent establishments) that buy products from related parties for resale and perform local “baseline marketing and distribution activities”.


It is proposed that “baseline marketing and distribution activities” will be defined and this definition will be likely to include distribution arrangements with:

  • a routine level of functionality;
  • no ownership of intangibles; and
  • no/limited risk.

There will also be a definition for relevant qualifying entities and activities, to be a positive definition based on qualitative and quantitative factors. It is proposed that there will also be a list of out of scope activities/entities. All of this remains to be determined.

Fixed percentage return

No proposals are made regarding the fixed percentage return. This is likely to be an important negotiation point between the members of the IF. It is acknowledged that there will be a need to balance compliance with the ALP and the simplification objective of Amount B.

Tax certainty, dispute prevention and resolution

This is a key area for many members of the IF and respondents to the consultation process, but also an area of significant complexity. Achieving consistency of implementation and administration globally, as well as an effective and efficient global dispute prevention/resolution system, will not be easy.

Unsurprisingly, the Statement does not propose detailed solutions to these issues at this stage, but does acknowledge the key issues and proposes conceptual solutions.

It is acknowledged that the existing international framework for preventing and resolving disputes is unlikely to be practical or workable in relation to the Pillar One taxing rights. Specifically:

  • disputes in relation to Pillar One and Amount A in particular are likely to involve multiple jurisdictions and there is not currently an effective international system of multijurisdictional dispute resolution;
  • current dispute resolution processes operate after the event (after tax has been paid/assessed) – they do not prevent disputes arising, only seek to resolve disputes, often very slowly and unsatisfactorily for taxpayers.

A new approach is proposed that focusses on providing upfront tax certainty to prevent disputes, but supported by a new clear, administrable and binding dispute resolution procedure. More specifically:

  • it is proposed that representative panels could be formed with the purpose of providing an upfront review of arrangements to give “before the event” tax certainty;
  • this panel could review and give opinions on all aspects of the Amount A determination for an MNE and could be binding on all relevant tax authorities;
  • this panel would also assist under-resourced tax authorities deal with these new taxing rights by enabling access to experts and guidance;
  • the introduction of a standardised global approach regulated by this representative body is hoped to ensure consistency in relation to the new taxing right as well as minimise compliance and administration costs;
  • there would be a mandatory binding dispute resolution mechanism to address any disputes that did arise.

The above approach is principally suggested to address issues with Amount A. It is considered in the Statement that the design of Amount B will largely limit disputes, with a fall-back on more traditional dispute prevention/resolution procedures such as MAPs and arbitration if required.

COMMENT – As experience has shown with multi-jurisdictional advanced pricing agreements, achieving upfront agreement on taxing principles on a multilateral basis in a timely manner can be very difficult. Furthermore, many countries (particularly developing countries) are increasingly opposed to outside influence and control over domestic taxing rights (e.g. through arbitration).

Implementation and administration


The discussion in the Statement on implementation is particularly interesting. Recognising that the Unified Approach and particularly Amount A will require implementation measures that go beyond amendments to existing domestic rules and treaties, the Statement proposes a new multilateral convention. However, this convention would be quite different from the MLI and much more ambitious in scope and effect:

  • the new convention would need to apply even between jurisdictions that do not currently have bilateral treaties in place;
  • it would need to contain all the provisions necessary to implement the unified approach (scope, nexus, profit allocation, elimination of double taxation and dispute resolution).

It is recognised that it would require “a strong impetus at the highest political level” across a critical mass of jurisdictions to implement a convention of this largely unique and unprecedented (at least from a tax perspective) nature.

COMMENT - As recognised, a multilateral convention of this nature that actually seeks to impose new and specific taxing rules on a global, multilateral basis is likely to be very difficult to achieve.


The Statement is quite light on the administration of the Unified Approach, beyond general statements on the need for consistent and efficient administration in order to keep compliance and administration costs to a minimum.

The Statement does suggest that a phased approach to the introduction of the new taxing rights, or a transitional period, could be considered in order to ease the administrative burdens.

Unilateral measures

The Statement reiterates that any consensus based agreement in relation to the Unified Approach must be tied to the repeal of or a commitment not to introduce unilateral digital tax measures.

Global safe harbour system

It has recently been proposed by the US that instead of being a set of mandatory rules, the Pillar One Unified Approach could instead be in the form of a global safe harbour which MNEs could opt into voluntarily to protect against the application of domestic digital tax measures or challenges under existing international tax rules.

Although this is an unpopular suggestion amongst other members of the IF, further consideration is to be given to this proposal and its technical viability.

Pillar Two

The Pillar Two minimum tax proposals are only addressed briefly in a progress note included at Annex 2 of the Statement. Broadly this note is essentially a summary of the OECD public consultation documents issued in November 2019, together with broad updates indicating that discussions are progressing in key areas and in relation to key issues. There are however very limited comments on the specific proposals or developments to the original November proposals.

Updated Programme of Work and timeline

Annex A to the Statement sets out in overview the remaining work for the IF, divided into 11 work streams covering all the issues discussed above.

The overall timeline to reach a consensus-based solution and publish a final report on both Pillar One and Pillar Two by the end of 2020 remains the same, but in addition there is now an objective of reaching agreement within the IF on the key policy features of a consensus-based solution to the Pillar One issues by July 2020.

COMMENT – Given the amount of work that remains and the potential difficulty to achieving consensus on key aspect of the proposals (for example, allocation percentages, a multilateral convention and binding dispute resolution), this timetable continues to be aggressive. Rushing through proposals without fully considering the ramifications or bottoming out the technical details runs the risk of defeating the central objectives of achieving tax certainty, minimising double taxation and preventing disputes.