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IBFD Task Force on Digital Economy Nov-11-2019

On 9 October 2019, the OECD/G20 released the Public Consultation Document “Secretariat Proposal for a 'Unified Approach' under Pillar One”. This document describes the “Unified Approach” to Pillar One, built on the commonalities identified in the Programme of Work adopted by the Inclusive Framework on BEPS.


IBFD continues to be at the forefront of developments in the tax arena and provides comments on and analysis of the impact of changes on the international tax framework. In this light, the IBFD Task Force on the Digital Economy (TFDE) has submitted its scholarly and independent comments on the Unified Approach to Pillar One.


The document starts with an overall assessment of the Public Consultation Document. In the view of the IBFD TFDE, adding an additional model treaty clause and determining an income tax nexus based on sales appears to be a pragmatic solution.
However, it leads to introducing a new ring-fenced nexus that will compartmentalize treaty application, which may not always be in line with the goals established by the Ottawa framework and does not sufficiently promote inter-nation equity. In addition, the differentiation among the three Amounts, A, B, and C and the allocation of taxing powers to residual profits introduce a further element of complexity that increases the possibility of mismatches across countries.
Therefore, it is possible that fine-tuning the PE concept could meet the income tax allocation and nexus challenges of the digitalized economy. Alternatively, it is possible to broaden the new nexus and address its impact at the level of allocation of taxing rights. This would allow, simultaneously, (i) a higher allocation of taxing rights to the market state for highly digitalized business in the presence of a significant contribution to value creation, and (ii) a lower or non-existent allocation in opposite circumstances, regardless of the type of business. Furthermore, complexity could be reduced through a more ambitious use of predetermined or fixed margins taking into account interesting experiences, such as that of Brazil.
The document elaborates on the content of the main technical proposal by the IBFD TFDE, and includes the contribution of the IBFD TFDE to the specific questions included in the Public Consultation Document.
The final version of this document will be published soon in the Bulletin for International Taxation, an online IBFD publication.