OECD Public Consultation Document and Public Commentary on the Tax Challenges of Digitalisation

In February and March of 2019, the OECD organized a public consultation process, releasing a consultation document on February 13, 2019, inviting public comments up until March 6, 2019, and holding a conference where industry experts presented key issues on March 13 and 14, 2019. The consultation document sets out a range of possible solutions to what have been identified as important issues for managing the tax challenges of an international digital economy. Despite the limited time frame of the consultation process, approximately 200 comments were received.


The OECD/G20 Base Erosion and Profit Shifting (BEPS) Project consists of 15 discrete action areas which target gaps in the international tax system that enable the shifting of profits away from the jurisdiction of the underlying economic activity. Action 1 of the BEPS Project is focused on tax challenges associated with digitalisation.

The Task Force on the Digital Economy (TFDE) developed the 2015 BEPS Action 1 Report, “Addressing the Tax Challenges of the Digital Economy”, which was released in October 2015 as part of the full BEPS Package and was endorsed by the G20 Leaders in November 2015.

In June 2016, the OECD/G20 Inclusive Framework on BEPS (the “Inclusive Framework”) was established to collaborate on the implementation of the BEPS Package and the mandate of the TFDE was extended to include the delivery of an interim report by 2018 and a final report in 2020.

In March 2018, the Inclusive Framework delivered its Interim Report which provided analysis, but no conclusions, regarding the tax challenges of the digital economy.

In January 2019, the Inclusive Framework produced a Policy Note which established two pillars, or focal points for discussion, on the digitalisation of the economy: problems raised directly by digitalisation and general BEPS problems exacerbated by digitalisation.

The public consultation document released in March 2019 describes the Inclusive Framework’s proposals concerning the two pillars established by the January 2019 Policy Note.

Proposals and Comments for Specifically Digital Issues: Profit Allocation and Nexus Rules

The key issue addressed by the proposals regarding profit allocation and nexus rules is how “remote” participation in a domestic economy should be taxed. As the Interim Report identified, there are three characteristics of the digital economy which pose taxation difficulties: the possibility of having scale without mass, a heavy reliance on intangible assets, and the significant role of data and user participation.

The public consultation document proposed three solutions: (i) the User Participation approach; (ii) the Marketing Intangibles approach; and (iii) the Significant Economic Presence approach. These proposed solutions all focus on value creation in the user/market jurisdiction, which is unrecognized by the current framework where taxing rights depend on taxable profits. Given that these proposed solutions would require a reallocation of multi-national group profits to user or market jurisdictions, the public consultation document anticipated that changes to existing tax treaty provisions may be necessary to eliminate double taxation.

The User Participation Approach

The User Participation approach is premised on the idea that acquiring users creates brand value, thereby increasing income. This approach would apply exclusively to “digital companies,” such as social media platforms, search engines, and online marketplaces, and would modify current profit allocation rules. The approach would require digital businesses to allocate an amount of profit to jurisdictions where their active and participatory user bases are located, irrespective of whether they have a local, physical presence. For example, the profits of Facebook would be allocated to a given jurisdiction according to user activity in that jurisdiction. To determine the value created by users, an allocation metric would need to be developed and agreed upon.

In respect of the User Participation approach, commentators have expressed concern that the approach:

  • ring-fences subsets of the digital economy (Accountancy Europe)  (Booking.com);
  • fails to appreciate that traditional companies are increasingly using digital means to achieve their business objectives blurring the distinction between digital and non-digital such that it doesn’t make sense to treat digital companies differently (Booking.com) (Silicon Valley Tax Directors Group) (Volvo AB);
  • oversimplifies the relevant issues by assuming that users contribute to the value of a company, when in fact users are valuable because they provide data which must then be processed in order to create value; and
  • is too narrow in the scope of activities to which it applies (Canadians for Tax Fairness).
The Marketing Intangibles Approach

Unlike the User Participation approach, the Marketing Intangibles approach would apply more broadly, taking into account digitalisation’s wide economic impact. The Marketing Intangibles approach would exclusively target and reallocate profits from “marketing intangibles,” such as income from brand name, customer data and customer relationships. The Marketing Intangibles approach recognizes that a multinational group can essentially “reach into” a jurisdiction, either remotely or through a limited local presence, to develop marketing intangibles, such as a user/customer base. The approach further recognizes there is an intrinsic functional link between marketing intangibles and the market jurisdiction.

Taking into account this link between marketing intangibles and the market jurisdiction, the Marketing Intangibles approach would modify current transfer pricing and treaty rules to require that marketing intangibles, and their associated risks, be allocated to the market jurisdiction. This would enable the market jurisdiction to tax some or all of the non-routine income associated with such intangibles and the related risks. All other income would be allocated among members of the multinational group based on existing transfer pricing principles.

In respect of the Marketing Intangibles approach, public commentators have submitted that the approach:

The Significant Economic Presence Approach

Echoing formulary apportionment approaches to multi-jurisdictional taxation, the Significant Economic Presence approach would update the traditional nexus approach such that a digital business would be taxed like a traditional business. This approach would achieve this by looking at a number of factors to determine whether an organization has a “significant economic presence” in a jurisdiction. The OECD lists several relevant factors: the existence of a user base and the associated data input; the volume of digital content derived from the jurisdiction; billing and collecting in a local currency or with a local form of payment; the maintenance of a website in a local language; responsibility for the final delivery of goods to customers or the provision by the enterprise of other support services such as after-sales service or repairs and maintenance; and sustained marketing and sales promotion activities, either online or otherwise, to attract customers. The global profits of a multinational group would then be allocated to jurisdictions where the group has a significant economic presence.

In respect of the Significant Economic Presence approach, public commentators have submitted that the approach:

  • risks creating a disconnect between tax outcomes and other legal and commercial circumstances (the global organization, Association of Chartered Certified Accountants);
  • will be difficult to develop because of its need to identify appropriate factors to establish a nexus (Association of Chartered Certified Accountants);
  • may be politically difficult to implement because some countries will inevitably win or lose from such a system (i.e. the tax base of countries which currently have nexus will likely decrease, whereas the tax base of countries which do not currently have nexus will increase) (Accountancy Europe);
  • will struggle to achieve consensus on the factors that will create significant economic presence, the allocation bases to be used, and what happens to losses in the value chain (Booking.com);
  • will not work because no set of connecting factors will ever be precise enough to consistently and meaningfully capture whether value has been created in the market;
  • fails to recognizes that consumption is the only value attributable to the market (not the profit of the corporate group as a whole), and as such, consumption taxes are the most appropriate mechanism for dealing with the challenges in this area;
  • is preferable because it would create more fundamental change, even if the details still need to be worked out (Canadians for Tax Fairness).

Proposals for BEPS Issues Exacerbated by Digitalisation

The key challenge addressed by the proposals regarding global anti-base erosion is the shifting of the tax base to low tax jurisdictions. The public consultation document considers a proposed solution which includes two distinct elements: an income inclusion rule and a tax on base eroding payments.

The income inclusion rule would tax the income of a foreign branch of a controlled entity domestically if that income was subject to a low effective tax rate in the foreign jurisdiction. The income tax would be calculated under domestic law, with shareholders entitled to a credit for tax paid to the foreign jurisdiction.

The tax on base eroding payments would deny a deduction or treaty relief for certain payments, unless those payments were subject to an effective tax rate at or above a minimum rate.

Both elements would be implemented by way of changes to domestic law and tax treaties, and would include a co-ordination or ordering rule to avoid the risk of double taxation that might otherwise arise where more than one jurisdiction seeks to apply these rules to the same structure or arrangements.

In respect of the proposals for an income inclusion rule and a tax on base eroding payments, public commentators have submitted that the proposals:

  • do not have any “digital triggers” (i.e. they also apply to traditional businesses). (Association of Chartered Certified Accountants);
  • will be difficult to implement because of challenges associated with developing a framework acceptable to all that does not impose undue administrative burdens and uncertainty, including the risk of double taxation (Association of Chartered Certified Accountants);
  • risk negatively affecting businesses’ legitimate economic activities in low-tax jurisdictions with additional tax or costly restructuring (Accountancy Europe);
  • may negatively affect countries that are able to support business activities that create value, but do not require a substantial corporate income tax base to finance their public spending (Accountancy Europe);
  • will be difficult to administer because it may require every piece of income or expense to be tested individually in relation to its effective taxation (American Chamber of Commerce in Germany);
  • should be limited to wholly artificial arrangements which do not reflect economic reality (i.e. they should essentially be avoidance rules) and should not apply to genuine economic activities (Booking.com);
  • should not apply to payments to or from third parties, and should only be applied to low-taxed passive income (dividends, interest, and royalties); (Booking.com); and
  • risk imposing double taxation on tax exempt investors (Canada Pension Plan Investment Board).


The public consultation process demonstrates the wide variety of stakeholders who have concerns regarding the digitalisation of the economy and the OECD’s response. This variety, and the range of the comments submitted, further indicates the difficulties that will be faced in achieving any amount of consensus.

The comments themselves offer rich, though disparate, insights into the digitalisation of the economy. We are looking forward to seeing the OECD’s proposed final solution to be delivered by the end of 2020. Over the next year, we will continue to follow the process closely, enabling us to help our international clients navigate the new regime.

Up Next

Stay tuned for our next post, which comments on the OECD’s new Programme of Work. The document, which calls for intensifying international discussions around the two main pillars, was approved during the May 28-29 plenary meeting of the Inclusive Framework, which brought together 289 delegates from 99 member countries and jurisdictions and 10 observer Organisations.