oecd’s proposal for ‘unified approach’ under pillar...

OECD’S proposal for ‘Unified Approach’ under Pillar One

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In which jurisdiction should the income be taxed?

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Movie produced by Walt Disney Studios

British and US actors involved

Movie shot in UAE, UK, Iceland and Ireland

Special effects carried out in US, Singapore,

UK and Canada

IP of movie resides in US

Movie screened throughout the world

Backdrop of taxation of digital economy

Unilateral measures by several countries to tax digitalized economy© 2019 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Tax challenges of digitalization of economy

leading to BEPS Action1 Report in 2015

Interim Report issued by TFDE in March 2018

Two Pillar approach suggested in Jan 2019

Pillar One focuses on allocation of taxing rights

Seeks to undertake review of profit allocation

& nexus rules

Discussion on user participation, marketing

intangibles and SEP proposals

Pillar Two envisages a GloBE proposal comprising

of:

Income inclusion rule

Tax on base eroding payments

Inclusive Framework adopted PoW in May 2019

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Alternate proposals for profit allocation & nexus rules

© 2019 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 4

Proposal User participation Marketing intangibles Significant economic

presence

Basis of Application

Value is created by

digitalised business by

developing user base and

soliciting data and content

contributions from users

Identifies functional link

between marketing

intangibles and market

jurisdiction

Taxable presence on

account of sustained

digital interaction with

market jurisdiction

Mechanics

Allocate profits to user

jurisdiction regardless of

physical presence

Attribute residual profit

that is attributable to

marketing intangibles to

the market jurisdiction

Factors for creating SEP –

user base, local website,

local billing, sustained

marketing etc.

Applicability

• Social Media Platforms

• Search Engines

• Online Marketplaces

All businesses (not only

digitalised)Several businesses

Proposed MethodNon-routine / residual

profit split approach

Non-routine/ residual

profit split approach

Fractional apportionment

method

Commonalities between alternate Proposals


Reallocation of taxing rights

in favor of user / market

jurisdiction

Establishing nexus beyond

physical presence

Focus on simplicity and

increased tax certainty

Allocation of profits beyond

ALP and departure from

separate entity principle

Commonalities between

alternatives

1 2

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Overview of Pillar one proposalProposes new profit allocation and nexus rules

Methods for profit allocation

Modified Residual Profit Split Method

Allocate portion of MNE group’s non routine profits to market jurisdictions

Fractional apportionment Method

Allocate profits without distinguishing between routine & non-routine profits

Distribution based approach

Allocation of routine & non-routine profit associated with marketing &

distribution functions

Explore use of business line and regional segmentation

Important differences between alternatives, calling for a “Unified Approach”


Key Features of Unified Approach


Covers digital business models as also consumer facing businessesSCOPE

NEW NEXUS Not dependent on physical presence but largely based on sales

NEW PROFIT ALLOCATION RULE

Complements ALP with formula-based solutions

THREE TIER PROFIT ALLOCATION MECHANISM

• Amount A – portion of deemed residual profit allocated to market

jurisdiction based on a formula

• Amount B – fixed remuneration for baseline marketing / distribution

functions

• Amount C – allocation of additional profits where functions exceed

baseline activity

7

1

2

3

4

Proposals prepared by Secretariat; do not represent views of IF or CFA

Deep dive into unified approach (1/2)SALE OF GOODS

Focus on large consumer facing

businesses

What would it encompass?

Will it cover B-to-B businesses?

Carve out of certain sectors

Consideration of size limitations

Covers cases of sustained and

significant involvement in market

jurisdiction

Revenue threshold being the

primary indicator thereof

New nexus through a standalone

rule – on top of PE rule

Ensure neutrality between different

business models

SCOPE NEXUS


Deep dive into unified approach (2/2)

9

AMOUNT A

Taxing right to market jurisdiction over portion of MNE group’s DNRP*

DNRP = Overall profit less DRP to be allocated to countries where activities are performed

Profit may be derived from consolidated financial statements

Profit may be determined on a business line / regional / market basis

Split of DNRP between the portion that is attributable to :

- Market Jurisdiction; and

- Other factors like trade intangibles, capital, risk etc.

DNRP attributable to market jurisdiction based on fixed percentage

Allocate portion of DNRP among market jurisdictions based on allocation key

AMOUNT B

Marketing and distribution functions to be compensated based on fixed return for an assumed

baseline activity

AMOUNT C

Compensation for additional functions over baseline activity

Avoid overlap with Amount A


*DNRP = Deemed non-routine profits

Illustration 1Group Profit = 1000

DNRP 300 DRP 700

100

(Mkt Jurisdiction –

Amount A)

200

(trade intangibles,

capital, risk, etc.)

Country 1

(Amount B - 50)Country 1

(Amount C – 20)

Country 1

50

Country 2

45

Country 3

25


Illustration 2P Co.

Q Co.

Country 1

Country 2

Country 3

Group X is an MNE group that provides streaming services

P Co owns the intangible assets exploited in the group’s streaming business

Q Co is responsible for marketing and distributing streaming services

Q Co sells streaming services to customers in country 2 and 3

Marketing & distribution

Owner of intangible asset

Sale of

streaming

services

Tax Implications

Country 2 • Right to tax portion of DNRP of Group X (Amount A)

• May tax income directly on P Co, with Q Co being jointly liable for tax

• Q Co to pay tax on fixed returns for marketing / distribution

activities (Amount B)

• Potential taxation of Amount C if activities of Q Co go beyond

baseline activity

Country 3 • Right to tax portion of DNRP of Group X (Amount A)

• No taxation of Amount B or C

Open Questions

Definition of activities

under Amount B?

Risk of duplication between

Amounts A, B and C?Interplay with PE attribution

under Article 7?

Entity within MNE group which

will be taxable in market

jurisdiction?

Relief from double

taxation?

Disparity of profit

based on business line

/ region?

Interplay with taxation of

royalties and FTS?

Mechanism for collection of tax?

Location of sales?

Treatment of losses?


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Way ForwardSALE OF GOODS

Public consultation on Pillar One on

21/22 November 2019

Outline of unified approach to be

agreed by January 2020

Political agreement on Pillar One

(Unified Approach) to be reached by

mid-2020

Global consensus-based solution to

the tax challenges of digitalization by

end of 2020


Pillar One Pillar Two

• Public consultation document on Pillar

Two released on 8 November 2019

• Public consultation on Pillar Two in

December 2019

• Main features of Pillar Two to be agreed

in January 2020

KPMG.com/in

Thank You

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