Multinational tax: the OECD’s Pillar One proposal

27 November 2020

PDF version [670KB]

Andrew Maslaris
Economic Policy Section

Executive summary

Against a background of increasing public and fiscal pressures, countries are continuing to grapple with how to get a ‘fair share’ of tax from highly digitalised multinational enterprises without adversely impacting on productivity, innovation or trade relationships.[1]

Despite on-going attempts by the Organisation for Economic Co-operation and Development (OECD) to fundamentally re-write the international tax framework, many countries have become increasingly frustrated at a perceived lack of progress and a lack of co-operation from the United States. In response, a number of European countries have turned to unilateral action in the form of an interim Digital Services Tax (DST)—that is, a tax levied on the income earned by large digitalised multinationals that provide digital advertising and digital platform services to citizens of that country.

On 20 March 2019, the Treasurer, Josh Frydenberg, announced that following public consultation, Australia’s focus was on pursuing a long-term solution at the OECD rather than an interim DST.[2] However, in light of reports in June 2020 that the United States had sought to delay talks on an OECD-led long-term solution, and with the increasing fiscal pressures arising from COVID-19, Australia may need to reconsider its position should progress stall.[3]

This paper seeks to provide readers with background information about the OECD’s attempts to provide countries with a greater share of tax from multinationals that have a significant economic presence, but a limited, or no, physical presence in that country (broadly known as the Pillar One proposal). The paper also draws out some of the technical design issues and political tensions underlying Pillar One and concludes that these may continue to delay the resolution of Pillar One and ultimately undermine an effective and meaningful long-term solution being reached. In turn, this may increase the incentive for countries to explore a DST as an interim response until such time as the OECD can find a solution that appeases all OECD members.


Executive summary
Structure of the Paper
PART A: TAXATION OF Multinational Enterprises (MNEs)
When is a MNE subject to Australian corporate income tax?


Australian resident entity
Non-resident entity


Australian resident
Australian Permanent Establishment

Other taxation rules and integrity mechanisms

Why is the OECD proposing to re-write the tax rules?
Countries are divided
The renewed mandate
The Interim Report
Pillars One and Two

The February 2019 Consultation Paper
The May 2019 Programme of Work
The ‘unified approach’—October 2019 consultation document
The ‘unified approach’—January 2020 Statement


Significant geo-political issues and strong opposition by the United States
Countries want quick solutions, but time and patience is needed
Core technical elements remain unresolved
Are Pillar One and Pillar Two consistent and will the revenue be significant?

Appendix A: Remaining work—Pillar One
Appendix B: Who may be subject to a DST?



This paper discusses the OECD’s Pillar One proposal, which attempts to re-write the international tax framework to provide countries with a greater share of tax from multinationals that have a significant economic presence in their country, but pay little or no tax in that country.[4]

The Pillar One proposal is being developed in conjunction with a second proposal—referred to as Pillar Two. Pillar Two broadly seeks to allocate a greater share of tax to the countries in which these multinationals are headquartered, and has been described as a form of global minimum tax (commonly referred to as the GloBE).[5] Therefore, Pillar One can be broadly categorised as seeking to provide a greater share of tax to the countries in which multinationals operate (referred to as market countries), whereas Pillar Two seeks to increase the share of tax payable in a multinationals ‘home’ country.[6]

The OECD has prioritised work on Pillar One and had initially aimed to have its key features settled by July 2020, with a view to producing a final report by the end of 2020.[7] However, following statements by the United States that the global response to COVID-19 should take priority, the July 2020 timeframe was extended to October 2020.[8] In October 2020, the OECD again announced it would delay the resolution of Pillar One, with further public consultation to take place in January 2021 and a mid-2021 timeframe proposed for finalising the design of Pillar One.[9]

As discussed in Part C, given the many unresolved technical issues as well as the uncertainty around the United States support,[10] it is unclear when Pillar One will be finalised and whether it will contain a meaningful and sustainable long-term solution.

The purpose of this paper is to equip readers with the ability to understand the significance of the OECD’s proposed policy and to critically evaluate some of the broader challenges and weaknesses associated with Pillar One.

Structure of the Paper

This paper is aimed at readers who do not have a detailed technical understanding of tax law or the international tax framework and as such, in some instances has simplified and generalised complex concepts.

The paper is structured as follows and is intended to be read sequentially:

  • Part A: Taxation of multinationals—provides a high-level overview of the principles that determine how the profits of businesses operating across multiple countries are taxed.
  • Part B: Pillar One—outlines why the OECD considers there is a need for reform of the international tax framework and provides an overview of the current Pillar One proposal (including how this proposal has changed over time). Part B also flags the significant tensions that exist between the United States and the EU Group of Four (France, Italy, Spain and the United Kingdom).
  • Part C: Where to next?—highlights some of the key challenges that exist with Pillar One, and considers whether this may ultimately weaken the likelihood of an effective long-term solution being reached.[11]

Due to the rapidly evolving nature of Pillar One, the discussion in this paper only incorporates developments up to June 2020,[12] and therefore does not discuss the consequences of the United States’ reported withdrawal of support for Pillar One in June 2020, the OECD’s claims in July 2020 that the United States had not ‘pulled out of the negotiations’; or the delay of the final Pillar One report and subsequent release of the Pillar One and Two blueprints.[13]


When is a MNE subject to Australian corporate income tax?

In a globalised economy, it is important that there are consistent and coherent rules to determine where the profits of MNEs are taxed. This is especially the case where highly integrated multinationals enter into cross-border transactions with their subsidiaries. In particular, rules are needed to:

  • ensure an appropriate allocation of tax amongst jurisdictions
  • avoid double taxation
  • encourage international trade and investment and
  • minimise conflict between tax administrations.[14]

In order to provide such a framework, the OECD has published the Model Tax Convention on Income and on Capital as well as specific rules and guidance outlining what price MNE’s should charge for related-party transactions (generally referred to as Transfer Pricing Rules).[15] Although most developed countries adopt the OECD rules in their domestic tax laws, a number of developing countries adopt rules developed by the United Nations,[16] and some countries a mix of both rules.[17]

Regardless of whether the OECD or UN models are adopted, there are generally two key considerations that arise to determine whether a MNE pays tax in a country:

  1. Does the MNE have a taxable presence in that country? That is, is the MNE a resident for tax purposes, or a non-resident that has a fixed place of business in that country (generally referred to as a Permanent Establishment (PE))?
  2. If the MNE is a resident or has a PE, how much tax is payable in that country? In Australia, residents will generally be subject to tax on their Australian sourced income and their passive income earned overseas.[18] Conversely, a non-resident with a fixed place of business in Australia will generally only pay tax on profits that can be attributed to, or connected to, value‑creating activities, assets or risks[19] located or assumed in Australia.

The Australian Treasury has published the following conceptual summary showing the differences in the tax treatment of residents and non-residents:

Figure one: Conceptual summary of Australia’s corporate tax framework[20]

Australian-sourced business income

Australian-sourced passive income

Foreign-sourced passive income

Foreign-sourced business income

Resident Taxable in Australia Taxable in Australia Taxable in Australia (with a credit for foreign tax paid) Taxable overseas
Non-resident Taxable in Australia Taxable overseas (Withholding tax may apply) Taxable overseas Taxable overseas

Source: The digital economy and Australia’s corporate tax system, Treasury, p. 5.

Some of the key concepts in this table are discussed in more detail below.


Australian resident entity

Broadly, a MNE will be considered to be an Australian resident for tax purposes where it is either:

  • incorporated in Australia or
  • if it is not incorporated in Australia, it carries on business in Australia, and has either:
    • its central management and control in Australia or
    • its voting power controlled by shareholders who are residents of Australia.[21]

In some cases, a taxpayer will satisfy the tax residency requirements of more than one country. For example, a company may be incorporated in the United States, but have its central management and control in Australia. In this situation, Australia’s tax treaties contain a set of ‘tie-breaker’ rules that have additional factors to be considered in order to determine tax residency. Conversely, MNEs may locate entities in certain jurisdictions to take advantage of mismatches or gaps in residency requirements—the result being that the entity is not a tax resident anywhere and its profits may escape corporate income tax.[22]

Non-resident entity

A MNE may also engage in business activities in Australia without incorporating an entity or locating its central management and control in Australia. For example, a company may operate an oil rig in Australian waters and manage its operation remotely, or a software company headquartered in Singapore may establish an Australian branch or office where staff provide after‑sales support services or in-country marketing and advertising.

Despite not satisfying the definition of an Australian tax resident, a non-resident may still be deemed to be an Australian taxpayer where their activities are substantial enough to constitute a fixed place of business.[23] In this scenario, the non-resident will be deemed to have an Australian Permanent Establishment (PE).[24]

As discussed below, the taxation of PEs is highly complex, however, the general effect of having a PE is that Australia will be entitled to tax profits of the non-resident entity to the extent that those profits can be linked to, or attributed to, value creating activities that take place in Australia.


Australian resident

Generally, an Australian resident entity will be subject to tax in Australia on their Australian‑sourced income and their passive income earned overseas (including passive income earned by foreign companies they control). For example, if an entity extracts iron ore in Australia and sells it to a Chinese business or a related-party in Singapore, then the income from that sale will generally be taxable in Australia.[25]

However, it is also common for MNEs to have highly integrated cross-border businesses operations. For example, a pharmaceutical company may develop a drug in Australia, run clinical trials and product development through a related-entity in Germany, hold legal protections in Switzerland, and marketing and management functions may be performed by a number of related entities around the world.[26]

In this situation, transfer pricing rules exist to ensure that the multinational pays a ‘fair share’ of tax on their related-party transactions—this is generally achieved by requiring those transactions to be priced for tax purposes at a value or price that unrelated parties dealing at arm’s length in comparable circumstances would have paid for the goods (known as the arm’s length principle).[27]

The transfer pricing rules also contain a number of valuation methodologies that can be used to determine the arm’s length price. For example, these rules may require the Australian entity to be reimbursed for the costs of undertaking drug development activities plus a mark-up (say 10 percent) to represent an arm’s length payment for their services.[28] Example 1 below provides a simplified explanation of the transfer pricing rules.

Example 1: simplified application of the transfer pricing rules

Letters Co is a large multinational conglomerate specialising in online search engine services and online advertising. Letters Co has developed complex algorithms and data capture technologies that analyse user internet searches and internet activities to match client advertising and user preferences in order to deliver highly targeted digital advertising.

Letters Co is headquartered in Ireland. Letters Co Ireland (LCI) develops and maintains the relevant computer algorithms and data capture technology and are the legal owners of all relevant intellectual property.

Letters Co has an Australian subsidiary (Letters Co Australia (LCA)), which provides digital advertising services in Australia.

LCA charges clients $100 for every advert that generates a click.

LCA operates a ‘buy-sell’ business model —that is, LCA pays a fee to LCI for access and use of Letters Co technologies and then LCA on-sells these services directly to clients. LCA also pays a fee to LCI to use Letters Co brand and image.

As this is a related-party transaction, the transfer pricing rules require LCA to pay an arm’s length fee. Applying the transfer pricing rules, LCA determines the arm’s length price for its related-party transactions are $95 calculated as follows (for simplicity this has been broken down into expenses per $100 of revenue):

  • exclusive use of algorithms and other technologies: $85
  • legal protections:  $5
  • exclusive use of Letters Co’s trademarks, branding and global marketing campaigns: $5
As such, for every $100 of revenue earned by LCA, it is required to pay LCI $95, meaning LCA has a $5 gross profit (before applying non-related party expenses, such as wages, rent and insurance).

Source: Parliamentary Library

Australian Permanent Establishment

As noted above, the rules for calculating the tax payable for PE’s are highly complex. This is because although there is only one legal entity (in this case, the non-resident entity), for tax purposes there are effectively two taxpayers and two businesses—that is, the portion of the non-residents activities that constitute a PE and the portion that does not.

A very simplified way of categorising the taxation of PE’s is as follows:

  • Identify the relevant ‘value creating activities’ of the PE: This broadly consists of two steps:
    • identify all of the functions performed, assets employed and risks assumed (FAR) by the non-resident—expressed another way, identify the value creating FAR of the non-resident entity and
    • identify which of the FAR relate to the PE and which of the FAR relate to the rest of the non-resident—that is, the non-resident is split into two entities for tax purposes.[29]
  • Allocate the income and expenses of the non-resident to the PE: this broadly requires that income and expenses are allocated according to the FAR or value creating activities of the PE (referred to as profit attribution). While beyond the scope of this paper, there are currently two-accepted ways of allocating income and expenses:[30]
    • The relevant business activity (RBA) approach—this broadly examines transactions entered into with third parties and seeks to allocate income and expenses between the PE and non-resident based on FAR. Generally, internal transactions between the PE and non-resident are not recognised.
    • The functionally separate entity (FSE) approach—this broadly deems the PE and the non‑resident entity to be separate and independent of each other and applies ordinary transfer pricing rules to determine an arm’s length price. Generally, internal transactions between the PE and non-resident are recognised.

Whether the FSE or RBA approach applies will generally be determined with reference to domestic law and tax treaties.[31] Example 2 below provides a simplified explanation of the PE attribution rules.

Example 2: simplified PE attribution

Numbers Co is Letters Co’s main competitor.

Numbers Co is headquartered in the United States and has incorporated a subsidiary in Singapore (Numbers Co Singapore (NCS)). NCS is responsible for sales activities and delivering digital advertising within the Asia-Pacific region, including Australia. NCS charges Australian customers $100 for every advert that generates a click.

NCS operates a small office in Australia, which provides advertising, marketing and support services, however, all digital advertising contracts are directly entered into with NCS and Australian customers, and NCS delivers the digital advertising product. The Australian office also provides some after-sales support services to NCS’ Australian customers.

Based on the activities undertaken in Australia, NCS is deemed to have a fixed place of business in Australia and therefore has an Australian PE. As such, NCS must determine how much of the $100 of revenue earned from an Australian click is attributable to its Australian activities.

NCS identifies its FAR and determines that for every $100 of revenue earned in Australia, $5 of this is attributable to its Australian activities (that is, Australia is considered to have created $5 of the $100).

NCS will lodge a tax return in Australia and calculate its tax liability in Australia by deducting eligible expenses (such as wages, rent and insurance) from its Australian income.

Source: Parliamentary Library

It should be noted that as a general principle, profit is generally allocated based on factors of production, such as labour, capital, land, and entrepreneurship (including the development, exploitation and protection of intangible assets). As such, neither the transfer pricing rules nor the PE rules currently recognise user created value, or the role of consumer demand, in generating profits.

Therefore, this means that the fact that a consumer may pay more for an iPhone in Australia than another country, or that demand from China may increase the price of iron ore, does not allow Australia or China a greater amount of tax based on these higher prices. Similarly, if Australian users have created value for digital businesses or platforms (for example, contributing reviews or personal data) or performed the underlying service (for example, driven an Uber or delivered food) this does not entitle Australia to any additional share of the profits that have been allocated to the non-resident entity.[32]

This means that highly digitalised MNEs can extract significant value from citizens of a country and generate profits from these transactions but have some of the profits recognised and taxed in another country. This idea is explored in more detail in the case study below.

Case study: ride sharing service provider

Kirk LLC is incorporated in the United States and develops and operates a global ride-sharing platform. The platform is delivered through a phone application that connects users in Australia with private drivers. The platform uses mapping technology and collects user data to rate, rank and match passengers and drivers.

The algorithms and technology delivering the app is developed and maintained in Ireland.

The app processes fares, and automatically transfers money directly to Ireland, with 75% of the fare remitted to the driver. This means that 25% of the fare remains in Ireland, notwithstanding the underlying activity of driving the car is wholly performed in Australia.

There is significant dispute amongst countries as to whether this is an appropriate outcome. While some countries contend that it is the algorithms and technology that make the transaction possible, others argue they should get a greater share of the ‘tax pie’ as the transaction is wholly performed in their country and some of the profits are attributable to user-created and in-country generated value (including legal and regulatory frameworks).[33]

Source: Parliamentary Library

Other taxation rules and integrity mechanisms

The international tax framework is also supplemented by withholding taxes, which broadly impose taxes on outbound payments of royalties, dividends and interest. In Australia, the following general rates apply (unless varied by a tax treaty):

  • Dividends—30 per cent
  • Interest—10 per cent
  • Royalties—30 per cent.

Australia has forty-five tax treaties (although the one with Greece is limited to airline profits).

Table one below summarises the effects of these tax treaties:

Table one: Number of countries at each withholding tax rate per DTA’s[34]










Dividends 9 16 5 - - 42 4 1
Interest 2 2 39 1 - 7 - 1
Royalties - 11 28 - 1 9 - 1

Source: CCH, Table of Treaty Withholding Tax Rates, November 2020.

Australia also has a number of domestic integrity measures aimed at ensuring multinationals pay their ‘fair share of tax’, including, but not limited to, the Diverted Profits Tax, the Multinational Anti-Avoidance Law, Hybrid-mismatch rules, Thin Capitalisation rules and Controlled Foreign Company rules.


Why is the OECD proposing to re-write the tax rules?

In response to growing concerns about multinational tax avoidance and the ‘perception that the domestic and international rules on the taxation of cross-border profits are now broken and that taxes are only paid by the naive’,[35] the OECD released a fifteen step Base Erosion and Profit Shifting Plan in 2013.

As explained by the OECD, Base Erosion and Profit Shifting (BEPS):

refers to tax planning strategies that exploit gaps and mismatches in tax rules to make profits ‘disappear’ for tax purposes or to shift profits to locations where there is little or no real activity but the taxes are low, resulting in little or no overall corporate tax being paid.[36]

Action 1 of the BEPS Action Plan specifically focussed on the Tax Challenges Arising from Digitalisation.[37] In October 2015, the OECD released their final report and concluded that the digital economy was increasingly becoming the economy itself and that it would be difficult, if not impossible, to ‘ring-fence’ it from the rest of the economy for tax purposes.[38] It was therefore recommended that the most effective way to deal with the tax challenges presented by the digital economy was through implementation of the broader BEPS recommendations, in particular recommendations relating to VAT/GST, Controlled Foreign Companies, artificial avoidance of PE and better aligning transfer pricing outcomes with value creation.[39]

Notwithstanding the considerable progress of the BEPS Action Plan, opportunity still exists for MNEs to limit the amount of tax they pay and there remains a strong public perception that tax rules are still broken.[40]

This is well illustrated by the OECD’s work on BEPS Action 7, which strengthens the rules relating to when an entity will be considered to have a taxable presence in a country. Although this has resulted in many MNEs restructuring their business operations to incorporate local subsidiaries in a country (known as a ‘buy-sell model’) there has not necessarily been an increase in the amounts of tax paid in those countries. As explained by the OECD:

... some countries highlighted the risks that even after such a restructuring digitalised MNE groups would be able to use local limited risk distributors to justify only minimal tax in the market jurisdiction, while being able to shift a disproportionately high amount of profit to a small number of affiliates in remote locations provided there is a correlation with a certain level of physical activity (e.g. functions that control risks and functions relating to the development, enhancement, maintenance, protection and exploitation of intangibles (DEMPE)). These countries were concerned that while the BEPS project had significantly contributed to realigning income from intangibles with value creation, notably by putting greater emphasis on real economic activities (e.g. Action 5, Actions 8-10), and by taking a more holistic approach to the review of cross-border transactions (e.g. Action 13), risks remain for highly mobile intangible income-producing factors which can be shifted into low-tax environments based on contractual allocations accompanied by a relatively modest level of decision-making capacity. These risks can arise for highly digitalised MNE groups as well as for MNE groups with more traditional business models.[41]

In their publication, Secretariat Proposal for a “Unified Approach” under Pillar One, the OECD stressed that without re-writing profit allocation rules and revising the arm’s length principle, countries are unlikely to increase the amount of tax collected from highly digitalised businesses:

In a digital age, the allocation of taxing rights can no longer be exclusively circumscribed by reference to physical presence. The current rules dating back to the 1920s are no longer sufficient to ensure a fair allocation of taxing rights in an increasingly globalised world. It is also true that a number of the proposals that have already been made to address highly digitalised businesses fail to capture significant parts of the digitalised economy (such as digital services and certain high-tech businesses). The Secretariat’s proposal is designed to respond to these challenges by creating a new taxing right. Therefore, and consistent with all the proposals that have been made, the Secretariat proposal includes a new nexus. From this follows the need to revise the rules on profit allocation as the traditional income allocation rules would today allocate zero profit to any nexus not based on physical presence, thus rendering changes to nexus pointless and invalidating the policy intent. That in turn requires a change to the nexus and profit allocation rules not just for situations where there is no physical presence, but also for those where there is. Otherwise, taxpayers could simply side-step the new rules by using alternative forms of an in-country presence (whether a local branch or related entity), making the new taxing right elective for taxpayers and creating an open invitation for tax planning.

The Secretariat’s proposal is designed to address the tax challenges of the digitalisation of the economy and to grant new taxing rights to the countries where users of highly digitalised business models are located. However, the approach also recognises that the transfer pricing and profit allocation issues at stake are of broader relevance. It recognises that current transfer pricing rules, even in a post-BEPS environment, face challenges. While there seems to be adherence among Inclusive Framework members to the principle that routine transactions can normally be priced at arm’s length, there are increasing doubts that the arm’s length principle can be relied on to give an appropriate result in all cases (such as, for example, cases involving non-routine profits from intangibles). Moreover, there seems to be agreement that the arm’s length principle is becoming an increasing source of complexity and that simplification would be desirable to contain the increasing administration and compliance costs of trying to apply it.[42] [emphasis added].

Countries are divided

Notwithstanding a general agreement amongst OECD member countries about the need to review the international tax framework, there is significant variance in views as to what (if any) problem exists and what a long-term solution could look like. The Australian Treasury has surmised that the tensions are largely attributable to countries ascribing to three different views:

The first group of countries views the lack of recognition of user contribution to value creation as a shortcoming of the international tax system, but considers that it can be addressed through targeted changes to the existing tax framework.

A second group of countries considers that the nexus and profit attribution rules may no longer be adequate. These countries consider that the problems are not limited to the digital economy. Some, but not all, of these countries reject user contribution as a significant driver of value creation.

A third group of countries considers that the BEPS Project has addressed concerns associated with double non-taxation (while acknowledging that the full implications cannot yet be assessed). Countries in this third group are generally satisfied with existing international tax rules. [43]

As noted above, tensions came to a head in June 2020 when the United States announced that they would withdraw from talks about Pillar One, citing a lack of progress and the need to prioritise its economic response to COVID-19.[44] Although the EU Group of Four[45] promptly offered a compromised Pillar One proposal to entice the United States back to discussions, the European Commission were not so forthcoming, stating that they would consider an EU-wide digital tax levy should a consensus solution not be reached by the end of 2020.[46] Notwithstanding the reported withdraw of the United States, they still sent a delegation to the OECD digital tax forum on 1 July 2020.[47]

In light of these various positions, and as discussed in Part C of this paper, a key challenge facing the OECD will be to develop a long-term solution that reconciles these differing positions and satisfies all members. This is something that may take considerable time in light of the significant divergence in views and outstanding technical issues that remain.[48]

The renewed mandate

Following increasing discontent over the effectiveness of the BEPS measures for highly digitalised businesses, the G20 resolved in 2017 that the OECD would undertake further work on the implications of digitalisation for taxation, with an interim report to be published in 2018 and a final report by 2020.[49]

The Interim Report

On 16 March 2018, the OECD released Tax Challenges Arising from Digitalisation - Interim Report 2018 (the Interim Report). The Interim Report identified that there are three characteristics common to digitalised businesses that can make it challenging to achieve perceived fair levels of taxation under the existing tax framework: 

  • cross-jurisdictional scale without mass: businesses can have a significant economic footprint in a country without needing a physical presence
  • reliance on intangible assets: complex algorithms that support platforms and/or generate revenue are often highly mobile and can be located in low or no-tax jurisdictions, enabling multinationals to recognise large amounts of income from their global operations in low or no tax jurisdictions and
  • data, user participation and their synergies with Intellectual Property (IP): businesses can generate significant profit from user-created content and network effects;[50] however, the international tax framework does not recognise this as a basis for allocating tax between countries. For example, where a digital platform has its value adding activities off-shore, any profits attributable to Australian-user created content will generally not be taxable in Australia.[51]

Although the Interim Report noted that these features exist in both digitalised and traditional businesses, it was considered that the synergies between user participation and intellectual property may be more prevalent among digitalised businesses.

Interim measures

Despite the OECD stating its preference for a consensus-based long-term global solution, the Interim Report recognised that some countries wanted to take more immediate action.[52] As such, the Interim Report included a detailed framework to guide those countries that wanted to impose an interim Digital Services Tax (DST). However, the OECD stressed that a DST should only be adopted as a temporary response, until such time as a long-term solution is agreed upon.[53]

Notwithstanding this, the Interim Report warned that DSTs could lead to, among other things, double-taxation, non-compliance with international trade agreements and discourage investment. It also cautioned that the economic incidence of DSTs may ultimately be borne by consumers rather than the businesses to which it applied.[54]

Is a long-term solution limited to only highly digitalised businesses?

The Interim Report also raised the question as to whether a proposed consensus-based longer‑term solution would be ‘focused on certain highly digitalised business models, or whether such a solution should be applicable to the broader economy’.[55]

As discussed below, the OECD appears to have formed the view that it should extend beyond the digital economy to some consumer facing goods, but this is not a view held by all countries.[56]

Pillars One and Two

Following the Interim Report, the OECD commenced work on a long-term solution to modernise the international tax framework. The purpose of this work is to ensure the international tax framework is fit-for-purpose in an environment where technological advancements have enabled businesses to have a significant economic presence in a country despite having a limited, or no, physical presence.[57]

As the OECD states, this work consists of two policy responses:

Pillar One — the Re-allocation of taxing rights

·         Addresses the question of business presence and activities without physical presence;

·         Will determine where tax should be paid and on what basis;

·         Will determine what portion of profits could or should be taxed in the jurisdictions where customers and/or users are located; 

Pillar Two — Global anti-base erosion mechanism

·         Will help to stop the shifting of profits to low or no tax jurisdiction facilitated by new technologies;

·         Will ensure a minimum level of tax is paid by multinational enterprises (MNEs);

·         Levels the playing field between traditional and digital companies.[58] 

To date the OECD has released the following key publications in respect of Pillars One and Two:

These documents provide insight into the OECDs policy deliberations and form the basis of the OECD’s Pillar One proposal that it hopes to now settle by mid-2021 (previously it had hoped to settle Pillar One by the end of 2020).[60]

The February 2019 Consultation Paper

The February 2019 Consultation Paper re-iterated the views expressed in the Interim Report that highly digitalised businesses can create value from a country without needing to establish a physical presence due to three characteristics common to such firms—scale without mass, a heavy reliance on intangible assets and the role of data and user participation.[61] The OECD illustrated this through the following example:

For example, some highly digitalised business models may solicit substantial contributions to, and active utilisation of, a web-based platform by a jurisdiction’s residents, generating substantial value for a business but, under the current tax rules, that jurisdiction may not have a taxing right over any of that business’s income. Some of these business models may facilitate large numbers of transactions between persons within the same country, similarly generating value for the business without creating any taxing right for the user or market jurisdiction – notwithstanding the highly localised impact of the utilisation of the platform. This “remote” participation in the domestic economy enabled by digital means but without a taxable physical presence is often seen as the key issue in the digital tax debate.[62]

Importantly, the OECD highlighted that a long-term solution should not only focus on questions of nexus (that is when will a taxpayer have a taxable presence in a country), but also the question of how to allocate taxing rights over the profits of MNEs:

any solution that seeks to address nexus must also address the closely related issue of profit allocation, or it is bound to fail – with likely increases in uncertainty and controversy without a meaningful increase in income allocation. This can easily be demonstrated by developments already taking place on the ground: in response to the BEPS package (including Action 7), some MNE groups with highly digitalised business models were able to establish local affiliates in market jurisdictions, especially in those jurisdictions constituting the businesses’ larger markets. However, the local affiliates are commonly structured to have no ownership interest in intangible assets, not to perform DEMPE functions, and not to assume any risks related to such assets. Accordingly, only a modest return may be allocated to these “limited risk distributors,” or LRDs. Thus, without effective changes to profit allocation rules, an MNE group may seek to sidestep the nexus issue by establishing local affiliates that are not entitled to an appropriate share of the group’s profit.[63]

In light of this, the OECD proposed the following three proposals for further consideration:

Table two: Summary of the February 2019 Consultation Paper proposals

Proposal What is the problem? What was proposed?
User Participation User participation can create value for MNEs that is not necessarily captured by the tax system. For example, users can contribute to brand creation, generation of valuable data, and development of critical user-mass which helps establish market power.[64]

Tax rules could be modified to allocate a set amount or percentage of profit to jurisdictions where businesses have active and participatory user bases, but no significant physical presence.[65]

The amount of profit to be allocated could be based on an amount above a normal or expected return (referred to as non-routine profits).[66]

Marketing Intangibles

MNEs can exploit customer and user bases to cultivate and develop strong marketing intangibles[67] associated with their brand or product, without having any physical presence in that country. For example, a MNE may generate value from goodwill associated with their brand or use customer data to generate valuable customer lists or relationships for commercial gain.[68]

The OECD noted that the more data that can be collected, analysed and exploited remotely, the easier it is to locate value adding functions, assets and risks in low, or no, tax jurisdictions —leading to increased opportunity for base erosion.[69]

Some of the profits generated from marketing intangibles could be allocated to a user or customer’s home jurisdiction.[70]

Similar to the User Participation model, countries could be entitled to a share of non-routine profits, which could be allocated based on an agreed upon formula. [71]

However, ‘unlike the user participation proposal, [the marketing intangibles proposal] would not be intended to apply only to a subset of highly digitalised businesses. Instead, it would have a wider scope in an effort to respond to the broader impact of the digitalisation on the economy’.[72]

Significant Economic Presence MNEs may have a significant economic presence in a country, but this may not be sufficient to give rise to a PE.[73] New rules could be developed to create a new category of taxpayer where a MNE has a significant economic presence in a country ‘on the basis of factors that evidence a purposeful and sustained interaction with the jurisdiction via digital technology and other automated means.’[74]

Source: Parliamentary Library based on OECD, Addressing the tax challenges of the digitalisation of the economy: Public consultation document, pp. 9–16.

The OECD stated that materiality thresholds would need to be applied to ensure that the new rules only applied to businesses that derived significant value from user participation and/or marketing intangibles.[75]

Importantly, the marketing intangibles proposal flagged the OECD’s intention to extend Pillar One beyond just highly digitalised businesses.[76]

The May 2019 Programme of Work

The May 2019 Programme of Work concluded that the commonalities existing between the three proposals outlined in the January 2019 Consultation Paper meant that the OECD could develop one unified consensus-based solution incorporating elements of all three proposals.[77]

Importantly, the May 2019 Programme of Work expressly recognised that a number of countries were concerned that the BEPS package did not necessarily deliver the outcomes they hoped for:

For some commentators and members of the Inclusive Framework the work on the tax challenges of digitalisation has revealed some more fundamental issues of the existing international tax framework, which have remained after the delivery of the BEPS package.

A further issue is the recognition that if the Inclusive Framework does not deliver a comprehensive consensus-based solution within the agreed G20 time frame, there is a risk that more jurisdictions will adopt uncoordinated unilateral tax measures. A growing number of jurisdictions are not content with the taxation outcomes produced by the current international tax system, and have or are seeking to impose various measures or interpretations of the current rules that risk significantly increasing compliance burdens, double taxation and uncertainty. One of the focal points of dissatisfaction relates to how the existing profit allocation and nexus rules take into account the increasing ability of businesses, in certain situations, to participate in the economic life of a jurisdiction without an associated or meaningful physical presence.[78]

In light of this growing discontent, the OECD stated they were committed to a solution to be delivered in 2020 in order to minimise the risk of countries taking unilateral actions, such as DSTs.[79] However, the OECD also explicitly stated that:

This timeline is extremely ambitious given the need to revisit fundamental aspects of the international tax system, but is reflective of the political imperative that all members of the Inclusive Framework attach to finding a timely resolution of the issues at stake.[80]

The ‘unified approach’—October 2019 consultation document

On 9 October 2019, the OECD released a public consultation document (the October 2019 Consultation Paper), which unified the three previously proposed options into one single proposal.[81]

In seeking to create a unified approach, the OECD noted that a number of commonalities existed between each proposal, namely that:

  • to the extent a highly digitalised business can operate remotely and/or is highly profitable, each proposal seeks to reallocate some taxing rights to the market country
  • each proposal envisages creating a new rule for MNEs that do not have a physical presence in a country
  • each proposal goes beyond the arm’s length principle in recognition of the fact that there may not always be a comparable arm’s length price and
  • all proposals aim to be simple, increase tax system stability and deliver certainty to taxpayers and administrators.[82]

Taking these commonalities into account, the OECD developed a proposed ‘unified approach’, which can be broadly summarised as follows:

Table 3: Summary of the October 2019 Consultation Paper–Unified approach

Element Description
Who the rules apply to

The new tax rules will apply to highly digitalised businesses and consumer facing businesses (with further work required on which consumer facing businesses will be included).[83]

As Pillar One will apply to consumer facing businesses,[84] it may extend beyond digital services providers. However, the OECD clarified Pillar One would not apply to extractive industries.[85]

When does an entity have a taxable presence in a country

Pillar One creates taxing rights over MNEs that have a significant economic presence in a country, despite having limited, or no, physical presence.[86]

The OECD noted that the new rules could apply where an entity has a sustained and significant economic involvement in a country—which, for example, could be determined with reference to a minimum amount of sales made in a country.[87]

Allocation of taxable profits for these new taxable entities

Pillar One will create a new rule for allocating MNE profits. This is because under the existing rules, where an entity does not have a physical presence in a country, there will be no profits allocated to that country as there are no FAR against which to allocate profits.[88] The OECD proposed that the unified approach would comprise a three-tier mechanism for allocating profits:

  • Deemed residual profit rule: countries will be entitled to a share of tax on an entity’s residual profit. Residual profit is broadly characterised as the profit that remains after allocating what would be regarded as a deemed routine profit on activities to the countries where the activities are performed (referred to as Amount A).
  • Market jurisdiction rule: current transfer pricing and PE rules will continue to apply to profits made in a country where there have been associated FAR in the country of sale, with the possibility of using fixed remunerations, reflecting an assumed baseline activity (referred to as Amount B). It would appear that this would be broadly based on the arm’s length principle.
  • Creation of legally binding and effective dispute resolution processes for all countries in relation to the new rules (referred to as Amount C).[89]

Source: Parliamentary library based on the OECD’s publication Secretariat Proposal for a “Unified Approach” under Pillar One (October 2019 Consultation Paper), pp. 5–9.

Pending key questions

The October 2019 Consultation Paper also expressly recognised that a number of significant issues remain unresolved, including:

  • Who will be subject to the new rules: although the October 2019 Consultation Paper noted that the new rules may include a range of materiality thresholds, it also stated that additional work was needed to determine what these thresholds would be, including whether a global sales threshold would be sufficient, or if further thresholds at a regional or business-line level would also be needed.
  • Double taxation and tax treaties: the October 2019 Consultation Paper highlighted that the new rules may not be consistent with existing provisions in tax treaties and domestic laws alleviating double taxation. As such, this may require tax treaties to be re-written to implement new rules. Given the number of reservations that have been entered into on the Multilateral Instrument with respect to Articles 5, 7 and 9 of the OECD Model Convention on Capital and on Income, this may require re-negotiation of individual tax treaties or negotiation of a new multilateral solution. Although not noted in the October 2019 Consultation Paper, this has the potential to slow the implementation of a long-term solution if countries attempt to recapture losses of tax revenue resulting from the new rules, by renegotiating other aspects of existing tax treaties.
  • Uneven playing field: related to the above point, the OECD expressed a concern that if the new rules are not simultaneously implemented, it may result in an uneven playing field, as the taxation rules applying to MNEs may not be the same between countries.
  • Collection and enforcement: the October 2019 Consultation Paper noted the need for increased co-operation amongst countries where a resident in one country is compelled to pay tax in another country where they have no physical presence. The OECD considered one potential mechanism of achieving this could be through creating a new withholding obligation on outbound payments.[90]

It should also be noted that the October 2019 Consultation Paper does not discuss profit attribution methodologies, meaning it is silent on fundamental technical issues such as what happens when users and content creators are located in different jurisdictions. For example, no indication is provided as to how profit from a YouTube advertisement is allocated if Google delivers an Asia-Pacific marketing package for a global brand through digital advertising on YouTube, where the advert played on a video uploaded and created in China and was viewed by an Australian resident on holidays in Thailand.

The ‘unified approach’—January 2020 Statement

On 31 January 2020, the OECD released updated information about the architecture of Pillar One incorporating comments received from the October 2019 Consultation Paper.

The January 2020 Statement also addressed comments by the United States in December 2019 that foreshadowed their lack of support for the proposed design of the Pillar One approach:[91]

Members note the technical challenges to develop a workable solution as well as some areas where critical policy differences remain which will have to be resolved to reach an agreement. They note a December 3 letter from the US Treasury Secretary to OECD Secretary-General Gurría reiterating the US political support for a multilateral solution and including a proposal to implement Pillar One on a ‘safe harbour’ basis. Many IF Members express concerns that implementing Pillar One on a ‘safe harbour’ basis could raise major difficulties, increase uncertainty and fail to meet all of the policy objectives of the overall process. The IF members note that, although the final decision on the matter will be taken only after the other elements of the consensus-based solution have been agreed upon, resolution of this issue is crucial to reaching consensus.[92]

Further, somewhat worryingly, the January 2020 statement stated that significant divergences still existed amongst countries—most notably with respect to the following key issues:

[Inclusive Framework] Members also recognise there are a number of other issues where significant divergences will have to be resolved. These include (i) the binding nature of dispute prevention and resolution mechanisms as well as the scope of the dispute resolution mechanisms under Amount C; (ii) the suggestion by some members to weight the quantum of Amount A to account for different degrees of digitalisation between inscope business activities (so-called “digital differentiation”); and (iii) the suggestion by some countries to account for regional factors in computing and allocating Amount A (through regional segmentation). Members note that concerns have been expressed by some jurisdictions and businesses about the continued application of Digital Service Taxes (DSTs). [93]

The proposed architecture

The January 2020 Statement sought to provide greater clarity around the basis on which countries would negotiate a Pillar One solution and further details about the three tier profit allocation model outlined in the October 2019 Consultation Paper:

  • Amount A: proposes a formulaic approach to allocate a share of residual profit to market jurisdictions. These new tax rules will apply to automated services and consumer facing businesses (discussed below) regardless of their physical location, provided they satisfy yet to be determined materiality thresholds. Amount A broadly incorporates the user participation and marketing intangible proposals.
  • Amount B: allows market countries to apply tax to a yet to be determined fixed level of remuneration based on the arm’s length principle for defined baseline distribution and marketing functions that occur in that country.
  • Amount C: allows market countries to apply tax to a yet to be determined additional amount of profit allocation based on the arm’s length principle, where functions performed in that country exceed the baseline level of activity compensated under Amount B. Additional work is required to determine how this will interact with Amount A. Amount C also emphasises the need for improved dispute resolution processes.[94]

Additional information about each of these proposals is summarised in table 4 below. Table 5 provides a summary of the businesses that may be within the scope of Amount A (note this is not a final or exhaustive list).[95]

Table 4: Summary of the three-tier profit allocation model

Proposal Challenge it sought to address What was proposed
Amount A

Designed to respond to the situation where businesses, as a result of globalisation and the digitalisation, can develop an active and sustained engagement in a market jurisdiction, beyond the mere conclusion of sales, without necessarily investing in local infrastructure and operations.[96] As a result, these businesses:

generally benefit from exploiting powerful customer or user network effects and generate substantial value from interaction with users and customers. They often benefit from data and content contributions made by users and from the intensive monitoring of users’ activities and the exploitation of corresponding data. In some models the customers may interact on an almost continuous basis with the supplier’s facilities and services.[97]

Broadly replicates the user participation and marketing intangibles proposals in the October 2019 Consultation Paper.

Will apply where a yet to be determined materiality threshold is satisfied and a business:

  • Provides automated and standardised digital services to a large global consumer base (usually remotely and from a low tax jurisdiction). However, professional services, extractive industries, and airline and shipping activities are excluded (with further consideration of unregulated financial services, such as peer-to-peer lending platforms).[98]
  • Generates revenue from selling goods or services to consumers (referred to as consumer facing businesses). Although resellers and intermediaries may fall within this second category, the OECD proposes an exemption where non‑branded components or inputs incorporated into a final product are sold.[99]

The January 2020 statement makes no mention of pharmaceutical products, however, this is most likely reflective of the fact that the final list of included and excluded activities has not yet been settled.

Amount B

Aims to standardise the remuneration of distributors that buy products from related parties for resale and that perform in-country baseline marketing and distribution functions.[100]

Unlike Amount A, Amount B is designed to remunerate a market jurisdiction with a fixed return for baseline distribution and marketing activities (broadly aligned with the arm’s length principle).

A set of rules will be developed that allocate to market countries a yet to be determined fixed amount of profits generated by a MNE that has local operations that perform baseline sales, marketing and distribution functions.[101]

The January 2020 Statement flags that a number of core design questions remain, including determining the definition of ‘baseline’ activities, an appropriate method for determining the relevant percentage and how to account for differences in profit margins across different business sectors.[102] As such, it appears significant work remains regarding Amount B.

Amount C

Provides a backstop to Amount B, by covering any additional profit where in‑country functions exceed the baseline activity compensated under Amount B.[103]

Appears to be broadly based on the market jurisdiction rule outlined in the October 2019 Consultation Paper and applies to businesses that operate a buy‑sell or redistribution model and perform more than just routine business functions.

The discussion in the January 2020 Statement relating to Amount C is primarily focussed on the need for effective dispute resolution mechanisms.

As such, there is no significant discussion about how Amount C may operate to adjust taxable profits resulting under Amount B. [104]

However, given the lack of detail around Amount B, it should therefore not be surprising that the January 2020 Statement is relatively silent on this point.

Source: Parliamentary Library based on The January 2020 Statement.

Table 5 on the following page provides a summary of the businesses that may be within the scope of Amount A (note the OECD did not produce a final or exhaustive list).[105]

Table 5: Additional information about the proposed scope of the Amount A proposal

Businesses in Scope Excluded Businesses Potential Threshold

Automated digital services, including online search engines, social media and online intermediation platforms, online gaming, cloud computing, online advertising and digital content streaming[106]

Consumer facing businesses, which may bring into scope the following, non-exhaustive list of businesses: personal computing products, clothes, toiletries, cosmetics, luxury goods, branded foods and refreshments, franchise models (including restaurant and hotels) and automobiles[107]

Professional services (such as legal, accounting, architectural, engineering and consulting)

Extractive industries and other producers and sellers of raw materials and commodities

Airline activities

Shipping activities

Non-branded components or inputs incorporated into a final product and sold to consumers

Potentially regulated financial services and insurance[108]

Revenue threshold:

  • Global revenue—possibly €750 million
  • Possible business line and regional revenue thresholds

Additional thresholds, including:

  • A de minimis profit
  • A sustained and on-going engagement in a country, potentially measured by In-country sales/revenue and/or number of consumers

Source: Parliamentary Library based on the January 2020 Statement, pages 9 to 13.

What does this mean?

It is now clear that Pillar One clearly retains some features of the arm’s length principle and also extends beyond highly digitalised businesses, with the January 2020 Statement identifying consumer facing businesses with strong reliance on marketing intangibles, such as luxury goods, branded coffee, automobiles, and restaurant and hotel franchises, as being within the scope of the Amount A taxing rules.[109] Although some commentators have criticised the OECD for ‘morphing’ Pillar One beyond its original policy scope, this criticism is somewhat unfair, as the ability of MNEs to exploit transfer pricing rules, especially relating to intangibles and licensing rights has been a long-standing weakness of the international tax system[110] and the February 2019 Consultation Paper clearly outlined an intention to change tax rules relating to profits from marketing intangibles.[111]

The OECD has also been criticised for Pillar One applying to a perceived patchwork quilt of businesses and industries rather than developing a coherent and consistent framework, with one commentator contending:

the three tier model is in ‘many ways a poorly-crafted re-write of decades-long, transfer pricing rules and a departure from the [arm’s length principle] to create what the OECD terms more fair system.[112]

Again, these criticisms may appear to be overblown and fail to recognise that the January 2020 Statement and November 2019 Consultation Paper are not final proposals. In particular, neither Paper provides meaningful information about the profit allocation methodology that will be adopted (as it has not been agreed), nor do they have a fully settled position as to which businesses or activities will be within the scope of Amount A.

On this latter point, it is important to recognise that were the OECD to provide just a general framework, taxpayers and tax administrators may complain that there is a lack of certainty as to which businesses are subject to the new rules (especially Amount A). Further, it is not necessarily a ‘simple solution’ to create a blanket rule as to when a business or industry will be a consumer facing business.

Indeed, these challenges are perhaps best exemplified in relation to pharmaceuticals. On their face, pharmaceuticals are consumer facing products and generate significant value from marketing intangibles—yet, they are not mentioned in the January 2020 Statement.[113] However, notwithstanding these characteristics, a number of nuances and complexities arise with respect to pharmaceuticals, including:

  • not all pharmaceuticals are available as consumer facing products—for example, a patient in hospital is unlikely to have a choice as to which brand of drug or pharmaceutical device they will use
  • while some products, such as Panadol or Voltaren clearly generate value from marketing intangibles, a number of generic drugs will not
  • some products will be subsidised by the Government in some countries, for example, a listing on the Pharmaceutical Benefit Scheme may increase the sales volume (and profits) of a pharmaceutical product and
  • some products and devices will be prevented by being advertised in some countries, or unable to be sold over the counter, or subject to restrictions on sales volume.

Therefore, these factors can all impact on the ‘value’ of a pharmaceutical product or device in a country and therefore make it difficult to create a definitive blanket rule stating that pharmaceuticals will always be consumer facing goods—and by extension, create difficulties for determining how to ‘price’ this value for the purposes of Pillar One.

However, despite these challenges, given the sheer size and scale of the pharmaceutical sector, it will be vitally important that the OECDs long-term solution clearly articulates how the pharmaceutical sector and Amount A interact and provide greater clarification over what is a consumer facing business—in many respects this also reinforces the enormity of the challenge facing the OECD to deliver a meaningful Pillar One solution in a timely manner.

Furthermore, the challenges with determining the scope of Pillar One were further illustrated by reports by Bloomberg in June 2020, that following a series of letters exchanged between the United States and the EU Group of Four, the Amount A proposal may be softened, with the EU Group of Four considering a phased implementation that would exclude marketing intangibles from the initial scope of Amount A:

France, the U.K., Italy and Spain offered to limit the scope of a proposed global digital tax, a concession after the U.S. threatened to hit those countries with tariffs if they moved ahead with planned levies on tech companies.

This approach “would considerably ease the task of achieving a consensus-based solution and make a political agreement within reach this year,” according to a letter to U.S. Treasury Secretary Steven Mnuchin obtained by Bloomberg News.[114]

Conversely, European Commissioner for Economy Paolo Gentilo responded to the United States reported withdrawal from talks by stating the European Union would consider an EU-wide digital tax levy.[115] This further highlights the strong political tensions that exist, and that further tinkering with Pillar One may not be an acceptable option for some countries.

It appears from an examination of the Pillar One Blueprint, that the scope of Amount A (and Pillar One more generally) remains far from settled:

With the Outline agreed in January 2020, the Inclusive Framework tried to bridge the gap between those members seeking to focus Pillar One on a narrower group of “digital” business models and those insisting that a solution should cover a wider scope of activities. As a result, two categories of activities to be included in the scope of the new taxing right created by Pillar One were identified: Automated Digital Services (ADS) and Consumer Facing Businesses (CFB). As discussed below, considerable technical work has been done on how these categories could be defined, but to date political agreement has not been reached on the use of these categories, and the scope issue is not yet solved. In order to deliver a solution in 2020 in accordance with the G20 mandate, some members have advocated for a phased implementation with ADS coming first and CFB following later. One member proposed implementing the new taxing right on a “safe harbour” basis, which would enable an MNE group to elect on a global basis to be subject to Pillar One.

The scope of Amount A remains to be settled upon.[116]

As such, given the uncertainty around what is a consumer facing business, what business or industries will be subject to Amount A, and how Amounts A, B and C interact, it is difficult to critically evaluate Pillar One. Further, and as discussed in Part C of this paper, the on-going lack of public consensus between key players, a potential phased implementation and threats of EU-wide digital tax levies, appear to represent a significant step backwards in achieving a meaningful consensus solution.

Indeed, a risk exists that a fragmented or tiered implementation may lead to a ‘ring-fenced’ approach to taxation of the digital economy, meaning that some business may continue to exploit marketing intangibles, ultimately undermining the whole purpose of Pillar One.

Unresolved issues

Pages 22 to 24 of the January 2020 Statement list eleven priority questions that remain to be resolved—these have been replicated at Appendix A and highlight the considerable amount of technical design issues that exist.


There are a number of unresolved issues and challenges with the Pillar One proposal that have the potential to either slow, or undermine, a consensus solution being agreed to and implemented in a timely manner.

This section undertakes a high-level discussion of some of these unresolved issues and the broader political and economic factors that may weaken the OECD’s ability to reach a meaningful consensus framework in a timely manner. As a result, there may be a heightened risk that countries may pursue unilateral actions such as interim DSTs.

This section is not intended to be exhaustive, but rather illustrate the enormity of the task facing the OECD and the international community more generally.

It is also important to recognise that the below discussion is based on an analysis of publicly available information—as such, it may not reflect of discussions or negotiations taking place behind closed doors.

Please note this does not consider developments after 30 June 2020 in any detail.

Significant geo-political issues and strong opposition by the United States

A significant area of tension amongst countries relates to the ability of large multinationals to remotely participate in their economy, disrupt existing domestic ‘brick and mortar’ businesses and then pay a perceived low-level of tax in that country by shifting profits overseas. For example:

  • Google and Facebook’s advertising services may directly reduce advertising revenues of print media and broadcasters, but the majority of profit from Google and Facebook’s Australian advertising services is recognised in another country
  • ride sharing service companies such as Uber may send as much as 25 per cent of a fare overseas, notwithstanding the entire transaction takes place in the ‘market’ country[117]
  • online marketplaces such as Amazon, eBay and the iTunes store may compete with domestic brick and mortar stores, but have a share of their profits taxed overseas
  • online accommodation websites such as, Expedia, and AirBnB compete with domestic hotel providers for bookings, but often booking fees and commissions are paid to an overseas affiliate and
  • some consumer facing businesses can extract significant additional profit from a market, due to consumers in that country being prepared to pay a higher price due to the marketing intangibles attached to the product, but those additional profits are not recognised as arising in the market jurisdiction.

In the above described situations, competing views emerge as to where tax should be paid. On the one hand, it may be argued that not only are domestic businesses and services being displaced, but the available corporate tax base is being eroded, as a percentage of profits are shifted overseas.[118] Conversely, countries ‘housing’ these companies often argue that they should receive the ‘lions share’ of tax revenue as a reward for creating the business and regulatory settings and investing in infrastructure in their country to attract and develop these major technological businesses—they may also argue that these business are enhancing consumer welfare and enhancing competition and productivity.[119]

It is clear the United States falls within the second category and is strongly opposed to any attempts that will, in their view, impose a disproportionate tax burden on United States headquartered companies.[120] Conversely, a number of European countries, most notably the EU Group of Four ascribe to the first view and have implemented or proposed an interim DST in an attempt to capture a ‘fairer’ share of tax from highly digitalised MNEs.[121]

Regardless of the respective merits of these views, the simple reality is that a core group of European countries and the United States have fundamentally opposed positions, and any long‑term solution that is not supported by the United States is likely to be largely ineffectual given how many major digital technology MNEs are American.[122]

This perhaps explains the EU Group of Four’s ‘olive branch’ for a phased implementation that initially excludes marketing intangibles from the scope of Amount A.[123] This ‘olive branch’ may reflect a general resignation that it is highly unlikely the United States (or at least the Trump administration) will agree to a long-term solution that results in United States businesses being worse off, or not receiving something back in return. This is supported by President Trump’s strong opposition to interim digital services taxes, including repeated threats of retaliatory tariffs and not pursuing Free Trade Agreements,[124] coupled with the United States view that their recent tax reforms largely addressed many BEPS issues.[125] Indeed, the United States Trade Representative Robert Lighthizer, was reported as stating to Congress that other nations had ganged up to ‘screw America’,[126] while the Australian Financial Review also reported Mr Lighthouse expressed the view that:

[a] variety of countries have decided that the easiest way to raise revenue is to tax somebody else's companies, and they happen to be ours. The United States will not let that happen.[127]

It has also been commented that while President-elect Joe Biden may be, ‘more conventional and more friendly to the international organizations’, than the Trump administration, many of the underlying concerns and interests of the United States have not changed.[128]

As such, there is a heightened risk that any long-term solution ends up being a damp squib to appease the United States and avoid an international trade-war.[129]

Countries want quick solutions, but time and patience is needed

Even before considering the significant geo-political factors at play, or the increasing fiscal pressures on governments as a result of COVID-19, the OECD’s proposal to fundamentally re‑write the international tax framework was a gargantuan task with a highly ambitious timeframe.[130]

To provide some perspective, it took almost five years for the OECD to complete its last update of transfer pricing guidelines—the OECD BEPS project launched in 2012, the BEPS Action Plan was released in 2013, and the OECD released its first tranche of recommendations for updating transfer pricing rules in October 2015, which were eventually incorporated into the OECD Transfer Pricing Guidelines in 2017. In contrast, the OECD is seeking to rewrite the entire international tax framework in a much shorter timeframe.

Given the enormity of what is being proposed and the fact it has taken two years to provide some general guiding principles, it would seem highly ambitious to think that a solution that appeases all countries will be reached and implemented in the next year or so. This is especially so considering this will require all OECD members to agree to a proposed framework (including resolution of many challenging issues), formally draft the new rules, have these new rules agreed to by OECD members and endorsed by the G20, and then implemented through updating the OECD Transfer Pricing Guidelines and international tax treaty network (which also requires approval of some domestic Parliaments).

Further, given the unprecedented costs associated with COVID-19, the lure of DSTs and increased tax collections is likely to only become increasingly attractive the longer the OECD takes to reach a meaningful long-term solution. For example, it has been reported that a DST is expected to raise the following amounts each year:

  • Spain—nearly €1 billion a year[131]
  • Italy—€600 million[132]
  • France—€500 million[133] and
  • the United Kingdom—between £275 million to £440 million.[134]

This sentiment has been echoed by the finance ministers of the EU Group of Four:

"The current Covid-19 crisis has confirmed the need to deliver a fair and consistent allocation of profit made by multinationals operating without - or with little - physical taxable presence," the letter said.

"The pandemic has accelerated a fundamental transformation in consumption habits and increased the use of digital services, consequently reinforcing digital business models' dominant position and increasing their revenue at the expense of more traditional businesses."[135]

Further, although the United States has been vocal in its criticisms and threats in relation to DSTs, some countries may consider that their ‘bark is worse than the bite’, given the United States tendency to negotiate a compromise, revoke that offer,[136] and then delay the start-date of the new tariffs.[137]

Core technical elements remain unresolved

In addition to the above issues, an even more fundamental problem remains—that despite almost three years of work, significant technical issues remain unresolved. For instance:

  • The scope of the rules are far from settled: as discussed above, although the October 2019 Consultation Paper and January 2020 Statement appear to have extended the scope of the tax beyond pure digital economy businesses, the EU Group of Four have now offered a phased implementation that would initially exclude certain consumer facing businesses. Although, this is an attempt to draw the United States back to the negotiating table, such a move is not universally supported within Europe,[138] and only serves to increase uncertainty and undermine the original premise of the need for new rules.
  • Uncertainty: the OECD’s proposals still lack key details about important principles. For example, the October 2019 Consultation Paper stated that transfer pricing rules will be complemented with formula based solutions where tensions in the current system are highest. Although there is a general discussion of an ‘allocation key’ a range of fundamental technical components remain unresolved.[139] Similarly, the January 2020 Statement is lacking in meaningful further details about key areas, restating that formulas will apply (with no discussion of actual set percentages), and that additional work is needed around basic definitional issues with Amounts B and C.[140] This suggests a lack of agreement and consensus amongst members and should be of some concern as these are fundamental elements of Pillar One—as such, the absence of consensus has the potential to significantly delay, or undermine the effectiveness of Pillar One.
  • Materiality thresholds and applying accounting concepts to determine tax outcomes: the October 2019 Consultation Paper flags that materiality thresholds could have reference to financial statements to determine the level of income earned at the global, regional or business-line level.[141] While on its face accounting concepts have worked relatively well to date for Country-by-Country Reporting, it is an entirely different proposition as to whether they will work for determining if a MNE is subject to Pillar One (and potentially subject to higher amounts of tax)—in particular, differences between accounting standards in some countries may present opportunities for MNEs to exploit differences in group membership rules and reported revenue to fall outside the scope of Pillar One or significantly reduce amounts of tax payable.[142] Further, although the use of accounting concepts to allocate additional taxation rights may appear compelling,[143] there are many well-known challenges and short-falls that may make it difficult or inappropriate to apply accounting concepts to determine ‘fairer’ tax outcomes.[144]
  • ‘Normal’ and non-routine profits: the October 2019 Consultation Paper and January 2020 Statement propose that non-routine business profits will be allocated to market countries with reference to information contained in consolidated financial statements.[145] Given the significant challenges that exist with the arm’s length principle, especially when a company argues that no arm’s length comparable exists,[146] it is difficult to see how non-routine business profits cannot be determined arbitrarily and how an arbitrary formula can be guaranteed to produce fairer outcomes.[147] However, as any formula is going to be subject to vigorous debate and negotiation, a significant risk exists that if it is set too low or too high a level, it may render Pillar One completely ineffectual in achieving its aim of achieving ‘fairer’ tax outcomes.
  • Integrity mechanisms: the OECD has to date been relatively silent on the need for integrity mechanisms. This is somewhat unsurprising given the lack of agreement on the principles underlying the design of the new rules. However, it is evident that considerable time will need to be dedicated to ensuring that MNEs cannot structure or fragment their business operations or activities in such a way so that they are either outside the scope of the new rules, or pay significantly less tax to market countries.

Are Pillar One and Pillar Two consistent and will the revenue be significant?

Although Pillar Two is not discussed in any detail in this paper, any discussion on the future of digital taxation should also consider the following comments by Oxford academics Michael Devereux and John Vella:

We should also be wary about the direction of [Pillar Two]. It moves in a diametrically opposed direction to Pillar I – towards taxation in the country of the parent, as opposed to the country of the market (although it might be argued that real aim is to raise tax rates in low tax countries). The combination of both Pillars I and II – together with everything in the existing system, which would remain – would mean that multinational profit is potentially subject to taxation everywhere. It is already difficult to discern the principles underlying the existing system of where profit is taxed; the only principle that might justify adding Pillars I and II would be to try to increase the probability that profit is taxed somewhere, anywhere.

Moving in both directions simultaneously would add further complexity to a system which is in serious danger of caving under the sheer weight of its labyrinthine rules. Developing countries and others with limited resources and capacity already struggle to operate the existing rules due to their complexity. This will make matters worse. [148]


Unfortunately, the October 2019 Consultation Paper and January 2020 Statement appear to do little more than re-iterate a number of well-known issues and fail to delivery any additional meaningful public guidance as to where the OECD may land on a number of substantive issues. For example:

  • there is little substantive discussion on Amounts B and C and their interactions with each other and Amount A
  • there is no meaningful progress in respect of how a ‘non-routine’ profit will be calculated or other key questions relating to profit attribution, other than a suggestion that it will be arbitrarily set with reference to a yet to be determined formula that may be based on accounting (rather than tax) concepts
  • since the 2015 Final Report, the OECD has continued to vacillate on the suitability of the arm’s length principle, with one commentator describing the OECD’s position as, ‘mind-bogglingly ambiguous’[149] and
  • the OECD’s position on consumer facing businesses is far from settled, which makes it difficult to determine how to identify and allocate non-routine profits.

As such, if the OECD is intending to fulfil its ambitious plans to reform the international tax framework in 2021, a real risk exists that the end result may be an arbitrary and patchwork approach that fails to meet the original policy objective of delivering fairer taxation outcomes for countries where MNEs have a significant economic presence, but a limited, or no, physical presence.[150] Conversely, it may be contended that the OECD is merely accepting the significant political tensions that exist and has decided that something (including a phased implementation of Pillar One) is a better option than the alternative—the status quo and/or a flurry of unilateral action.

Regardless of which of these views is ascribed to, the apparent absence of progress demonstrates the considerable challenges facing the OECD in achieving the agreement of a highly divided cohort of member countries, who at their core, have fundamentally different views about the extent to which the international tax framework should be modified for the purpose of taxing highly digitalised businesses.[151] When this division is coupled with the significant number of unresolved design issues and the uncertainty about the status of negotiations, it appears the OECDs deadline of resolving the Pillar One architecture by mid-2021 is becoming more ambitious by the day.

This lack of progress also has potential ramifications for Australia. Although the Australian Government has stated it strongly supports a consensus solution, the uncertainty around the United States’ support for Pillar One coupled with the purported ‘backdown’ by the EU Group of Four and existence of a number of other European countries that have announced or legislated interim DSTs, coupled with increasing budgetary pressures, may present the Government with a difficult political question—wait for a consensus solution at OECD-level but forego additional tax revenue, or join a block of first and second movers and risk potential retaliation from the United States?

However, perhaps the biggest question and area of uncertainty is not what the ultimate solution may look like or when it will be reached, but rather how much additional tax revenue will it raise and will some countries be worse off? If the answer to this question is unsatisfactory to a number of countries (or even just the United States), there is a risk that Pillar One may ultimately be ineffective. However, these hurdles are unlikely to reduce the need for a revision of the international tax framework, and as such Pillars One and Two may merely be the first step on the long road to international tax reform.

Appendix A: Remaining work—Pillar One

The below is a reproduction of pages 22 to 24 of the January 2020 Statement (citations have been omitted).

Remaining work

As noted in the Outline of the Architecture of a Unified Approach on Pillar One, the remaining technical and policy issues to be resolved under Pillar One have been grouped into 11 work streams, namely:

  • Scope of Amount A – The need to address definitional issues for the scope for Amount A (e.g., consumer-facing businesses, automated digital services), develop appropriate revenue and profit thresholds, consider and define carve-outs, examine interactions with other elements of Amount A design and thresholds, and consider whether there are implications for the scope of Amount A of implementing Pillar One on a ‘safe harbour’ basis (see work stream XI below).
  • New nexus rules and related treaty considerations for Amount A – The need to define a new nexus rule based on indicators of significant and sustained engagement with market jurisdictions, which could in some circumstances be unconstrained by physical presence. However, the mere conclusion of sales of tangible goods in the market jurisdiction would not create the new nexus. In addition, this work will consider how to streamline filing obligations and avoid duplication; explore interactions with existing treaty provisions; develop a standalone rule for nexus to avoid unintended spill over effects; and develop revenue-sourcing rules.
  • Tax base determinations – The need to assess the materiality of differences in financial accounting standards and explore mechanisms to address them; confirm that a profit before tax figure is preferred over other profit level indicators and examine whether potential adjustments to the profit before tax in the consolidated financial accounts are required to be made; consider rules for business line and regional segmentation for the purposes of computing Amount A, explore the materiality and impact of regional differences in profit margins; and assess administrability of using simplification measures to limit the burden of the new rules on tax administrations and taxpayers alike while retaining a principle-based approach. This work will also address issues and options in connection with the design of rules for the treatment of losses under Amount A including the calculation and definition of losses and the design of carry-forward rules that govern how losses can be offset against future profits.
  • Quantum of Amount A – The need to conduct economic analysis to inform the decision on the appropriate thresholds for the percentage(s) of profit that represents the deemed residual return, and the design of the formula (e.g. portion of residual profit allocable to market jurisdictions). This work will also explore digital differentiation and the possibility of resulting adjustments to the formulaic computation of Amount A, including different percentages applied to different businesses, and/or providing returns to market jurisdictions based on identified activities performed remotely or for the deemed performance of some activities in those jurisdictions.
  • Revenue sourcing under Amount A – The need to design source rules to allocate revenues to specific market/user jurisdictions by identifying principles and objectives as well as considering relevant proxies that could support its application to different business models (e.g. multi-sided business models such as online advertising). This work is relevant for both nexus and profit allocation rules, and will also explore the practical and administrative issues that may arise in establishing and administering revenue sourcing rules, including whether and in what circumstances to look through independent distributors and how to do so.
  • Elimination of double taxation under Amount A – The need to address issues and options in connection with the elimination of double taxation for Amount A such as identification of the taxpayers deemed to own the taxable profit corresponding to Amount A ; the design of new methods (update of existing rules) to eliminate double taxation; and the need for new rules in the context of a new multilateral convention to provide a relief-of-double-taxation mechanism to address gaps in existing bilateral treaty relationships.
  • Interactions between Amounts A, B and C and potential risks of double counting – The need to address issues and options in connection with the interactions between Amounts A, B and C, with a focus on potential double counting issues such as the design of mechanisms to eliminate any double taxation including by adjustment of Amount A. This work will also include the design of Amount A so that there is no impact or influence on other taxes (e.g. Value Added Tax, excise taxes, customs duty, etc.); the design of Amount B so it only remunerates baseline distribution and marketing activities; and identification of any other interactions, including with unrelated articles of bilateral double taxation agreements.
  • Features of Amount B – The need to address issues and options related to the design features of Amount B such as definition of “base line” distribution activities; determination of the quantum including use of fixed percentage(s); identification of an appropriate profit level indicator; the use of publicly available information for various industries and regions; considering the impact of regional differences in profit margins across regions and industries; the adoption of exemptions; the treatment of multifunctional entities and entities with very low system profits; and implementation issues, including coordination with the current transfer pricing system without giving rise to double taxation or double non-taxation.
  • Dispute prevention and resolution for Amount A – The need to address issues and options in connection with new approaches to enhance tax certainty and to prevent and resolve tax disputes. This will include the development of a new approach on a multilateral basis, to provide early certainty to prevent disputes and to minimise compliance and administration costs as well as measures to timely resolve any disputes that do arise. This approach will be mandatory and binding. The work here may be done in the context of a potential new multilateral convention to address gaps in treaty coverage between multiple jurisdictions, given the multilateral nature of Amount A.
  • Dispute prevention and resolution for Amounts B and C – The need to explore issues and options in connection with the development of effective dispute prevention and resolution procedures, such as the design of mandatory binding dispute resolution mechanisms (including mechanisms developed under Amount A) and any necessary enhancements to existing rules on mutual agreement procedures to prevent potential disputes and/or facilitate their resolution.
  • Implementation and administration – The need to address issues and options in connection with the implementation and administration of the Unified Approach (Amounts A, B and C), such as exploring changes in domestic legislation; exploring feasibility and implications of implementing Pillar One on a ‘safe harbour’ basis; identifying the required changes to tax treaties and exchange of information mechanisms; the design of a multilateral convention (including the applicability of different elements of the solution (Amounts A, B and C) in relation to jurisdictions that are not currently covered by a relevant bilateral tax treaty) with coordinated entry into force provisions; the identification of relevant unilateral measures; measures to limit compliance and administrative costs and maximise certainty, including in situation involving multiple jurisdictions; and options/procedures to make the new taxing right as simple as possible. In relation to a ‘safe harbour’ approach, detailed consideration will be required to assess key impacts and issues of implementing such an approach. These key considerations include estimation of revenue impacts for jurisdictions, feasibility of a system in which some MNE groups elect in and others do not, required operating and administration rules (e.g. process for electing and revoking an election, carry-over of tax attributes from pre-electing years, reorganisations of the MNE group), required treaty and domestic law changes, interactions with dispute prevention and resolution measures, implications for unilateral measures, the likely behavioural implications for taxpayers and jurisdictions, and the design of double taxation relief mechanisms.

Appendix B: Who may be subject to a DST?

As part of their section 301 investigation into France’s DST, the United States Government analysed which businesses would potentially be subject to the DST. Based on the thresholds applying for France’s DST—namely, global income of €750 million and €25 million worth of taxable services performed in France—it was concluded that:[152]

[e]vidence on the record suggests that approximately twenty-seven company groups will be covered by the DST, as depicted in the chart below. Because the DST determines revenues at the group level, the chart lists companies by group but also denotes where multiple subsidiaries or brands of a company group will be covered. For example, Alphabet, Inc., is expected to incur DST liability with respect to Google, LLC and the Google subsidiary YouTube. Match Group is expected to incur DST liability with respect to, Meetic, and Tinder. Facebook, Inc. will incur liability with respect to Facebook and Instagram. The company groups likely to be covered are as follows:

Table showing company groups expected to be covered by DST

Source: United States Government, Section 301 Investigation: Report on France’s Digital Services Taxes, op. cit., pp. 25-26.

[1].     See for example, M Scott, D Palmer and E Braun, The U.S. is hurtling toward another trade war — but this time it isn't with China,, 18 June 2020.

[2].     J Frydenberg (Treasurer), Government response to digital economy consultation, media release, 20 March 2019. 

[3].     However, see, A Mitchell, T Voon and J Hepburn, Taxing Tech: Risks of an Australian Digital Services Tax Under International Economic Law, 20(1) Melbourne Journal of International Law, 1 July 2019, for a discussion of whether a DST would be consistent with Australia’s international trade obligations.

[4].     See for example, OECD, Secretariat Proposal for a “Unified Approach” under Pillar One, October 2019, OECD, and OECD, 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 in January 2020, January 2020.

[5].     See for example, L Eden, INSIGHT: Taxing Multinationals—The GloBE Proposal for a Global Minimum Tax, 6 December 2019.

[6].     See, M Devereux and J Vella, What problems might the GloBE solve?, University of Oxford – Said Business School, 18 February 2020, for a discussion of whether Pillars One and Two are consistent.

[7].     OECD, 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 in January 2020, January 2020.

[8].     OECD, OECD Tax Talks, 22 July 2020, slides 8, 13 and 16.

[9].     OECD, OECD/G20 Inclusive Framework on BEPS invites public input on the Reports on Pillar One and Pillar Two Blueprint, 12 October 2020 and OECD, Tax Challenges Arising from Digitalisation – Report on Pillar One Blueprint, p. 9.

[10].     See for example, A Rappeport, A Swanson, J Tankersely and L Alderman, U.S. Withdraws From Global Digital Tax Talks, New York Times, 17 June 2020, France 24, US stymies key OECD talks on taxing digital corporate giants, blaming Covid-19, France 24, 18 June 2020 and Al Jazeera, US-EU trade war feared after Washington quits digital tax talks, 19 June 2020. See also,  Bloomberg Tax, Pascal Saint-Amans on Progress With Global Tax Talks (Podcast), 26 June 2020, which states that the United States have not withdrawn from Pillar One, but rather sought to delay it till 2021.

[11].           For a general discussion of France’s DST, see A Maslaris, France’s Digital Services Tax, 9 August 2019, Parliamentary Library, Canberra.

[12].           Therefore, the latest OECD discussion paper referred to is the 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 in January 2020.

[13].           L Thomas, OECD says US still committed to global digital tax talks, ITnews, 2 July 2020, OECD, OECD/G20 Inclusive Framework on BEPS invites public input on the Reports on Pillar One and Pillar Two Blueprint, op. cit., and OECD, Tax Challenges Arising from Digitalisation – Report on Pillar One Blueprint, op. cit.

[14].           OECD, OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, p. 16.

[15].           See generally, OECD, OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, op. cit., and OECD, Attribution of Profits to Permanent Establishments.

[16].           See for example, United Nations, United Nations Practical Manual on Transfer Pricing, and United Nations, UN Model Double Taxation Convention between Developed and Developing Countries.

[17].           For the purposes of this paper, the phrase ‘international tax framework’ is used as a generalised term to refer to the existence of transfer pricing rules and existing tax treaties (broadly based on OECD and UN framework mentioned above).

[18].           The distinction between passive and active income is not always clear, however, as a general proposition passive income refers to income from investment activities, such as interest income, royalty income and dividends. Conversely, active income broadly refers to income that is generated from active business activities such as sales, marketing or manufacturing activities. However, the distinction between passive and active income can become blurred where an entity generates what would ordinarily be passive income as part of its active business activities, for example, in the case of an entity that provides lending facilities, interest income it earns may be active; or a business that licenses out its intellectual property to third parties may receive royalty income that is characterised as active income.

[19].           Broadly, it is considered that where an entity assumes a level of risk, it should be entitled to a share of profits that are referable to that risk. Therefore, the international tax framework seeks to recognise that the assumption of risks, such as the legal risk of being sued, market risk or financial risk  are an important element of value creation leading to generation of profits. This is explained in more detail by, OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, op. cit., p. 53:

A functional analysis is incomplete unless the material risks assumed by each party have been identified and considered since the actual assumption of risks would influence the prices and other conditions of transactions between the associated enterprises. Usually, in the open market, the assumption of increased risk would also be compensated by an increase in the expected return, although the actual return may or may not increase depending on the degree to which the risks are actually realised. The level and assumption of risk, therefore, are economically relevant characteristics that can be significant in determining the outcome of a transfer pricing analysis...

Identifying risks goes hand in hand with identifying functions and assets and is integral to the process of identifying the commercial or financial relations between the associated enterprises and of accurately delineating the transaction or transactions.

The assumption of risks associated with a commercial opportunity affects the profit potential of that opportunity in the open market, and the allocation of risks assumed between the parties to the arrangement affects how profits or losses resulting from the transaction are allocated at arm’s length through the pricing of the transaction. Therefore, in making comparisons between controlled and uncontrolled transactions and between controlled and uncontrolled parties it is necessary to analyse what risks have been assumed, what functions are performed that relate to or affect the assumption or impact of these risks and which party or parties to the transaction assume these risks.

[20].           Please note, this is subject to applicable domestic laws and treaties.

[21].           Income Tax Assessment Act 1936 (ITAA 1936), subsection 6(1)—paragraph (b) of the definition of ‘resident’ or ‘resident of Australia

[22].           See for example, A Ting, iTax - Apple's International Tax Structure and the Double Non-Taxation Issue, British Tax Review 2014 No.1, which discusses Apple taking advantage of Irish and United States residency rules.

[23].           The term ‘permanent establishment’ is defined in subsection 6(1) of the ITAA 1936 and further modified in each of Australia’s tax treaties. As such, the specific circumstances as to when a PE may arise can differ on a case-by-case basis. Therefore, for the purposes of this paper, the phrase ‘fixed place of business’ has been adopted as a generalised and simplified explanation.

[24].           For a more detailed explanation of when a PE will be deemed to exist, see, OECD, Model Tax Convention on Income and on Capital 2017, 18 December 2017, Article 5.

[25].           However, the amount of tax payable may be reduced by expenses paid in both Australia and overseas in relation to the generation of income from the extraction and sale of iron ore.

[26].     See also, R McClure, R Lanis and B Govendir, Analysis of Tax Avoidance Strategies of Top Foreign Multinationals Operating in

        Australia: An Expose, Tabled Additional Documents to the Senate Economics Committee Corporate Tax Avoidance Inquiry, 19 April 2016.

[27].           See for example Australia’s cross-border transfer pricing rules in Division 815 of Part 4-5 in Chapter 4 of the Income Tax Assessment Act 1997 (ITAA 1997), and subsections  815-125, 815-135, 815-225 and 815-235.

[28].           For a more detailed discussion of transfer pricing methodologies see, OECD, OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2017, Chapter 2, July 2017.

[29].           The is a simplified explanation based on Articles 7 and 9 of the OECD Model Tax Convention and the OECD’s Report on Attribution of Profits to Permanent Establishments. Please note that Part IIIB of the ITAA 1936 contains specific rules in relation to Australian branches of foreign banks.

[30].           Australian Government, Review of Tax Arrangements Applying to Permanent Establishments: A Report to the Assistant Treasurer, Board of Taxation, April 2013, p. 2

[31].           Ibid., p. 19.

[32].  However, it should be noted that the individual performing the service will be subject to Australian income tax on their share of income received.

[33].           This is discussed in more detail in Parts B and C of this Paper.

[34].           The table double counts a country where there are multiple WHT rates applying.

[35].           OECD, Addressing Base Erosion and Profit Shifting, 1 January 2013.

[36].           OECD, ‘Bitesize BEPS’.

[37].           OECD, ‘Action 1 Tax Challenges Arising from Digitalisation’.

[38].           OECD, Addressing the Tax Challenges of the Digital Economy, Action 1 - 2015 Final Report, October 2015, p. 11.

[39].           Ibid., p. 94.

[40].           OECD, Addressing the tax challenges of the digitalisation of the economy: Public consultation document, February 2019, p. 6.    

[41].           Ibid.

[42].           OECD, Secretariat Proposal for a “Unified Approach” under Pillar One, October 2019, p. 16.

[43].           Australian Government, The digital economy and Australia’s corporate tax system, Treasury, October 2018, pp.13-14.

[44].     See for example, A Rappeport, A Swanson, J Tankersely and L Alderman, U.S. Withdraws From Global Digital Tax Talks, New York Times, 17 June 2020, France 24, US stymies key OECD talks on taxing digital corporate giants, blaming Covid-19, France 24, 18 June 2020 and Al Jazeera, US-EU trade war feared after Washington quits digital tax talks, Al Jazeera, 19 June 2020. See also,  Bloomberg Tax, Pascal Saint-Amans on Progress With Global Tax Talks (Podcast), Bloomberg Tax, 26 June 2020, which states that the United States have not withdrawn from Pillar One, but rather sought to delay it till 2021.

[45].           Alberto Brambilla and Richard Bravo, France, U.K. offer to limit digital tax scope after U.S. threat, Bloomberg News, accessed 26 June 2020.

[46].           B Smith-Meyer, European tax czar: EU ready to launch digital tax if U.S. stalls talks,, 18 June 2020.

[47].           L Thomas, OECD says U.S. still committed to global digital tax talks, Reuters website, 1 July 2020.

[48].           OECD, OECD/G20 Inclusive Framework on BEPS invites public input on the Reports on Pillar One and Pillar Two Blueprint, op. cit.

[49].           OECD, Brief of the tax challenges arising from digitalisation interim report 2018, OECD, p. 1, accessed 29 June 2020.

[50].           Broadly, a network effect refers to the concept that an increase in the amount of users increases the value of a good or service. For example, the more people using Twitter or Facebook, the greater the value of those platforms.

[51].           OECD, Tax Challenges Arising from Digitalisation - Interim Report 2018, OECD, p. 24, 16 March 2018.   

[52].           Ibid., p. 20

[53].           Ibid., pp. 178-180.

[54].           Ibid.

[55].           Ibid., p. 173.

[56].           See, J Demarthon, OECD Hoping for ‘Blueprints’ of Digital Tax Plan by October, Bloomberg Tax, 14 July 2020, which states that, ‘Saint-Amans said at the “core of the negotiation” is a discussion about whether the scope of the digital tax should be extended beyond online companies to all large consumer facing multinationals. The European Union has supported applying Pillar One broadly, to consumer facing companies, but a number of EU member states have recently proposed applying the rules only to digital companies in a first phase, Angel said.’

[57].           OECD, Action 1 Tax Challenges Arising from Digitalisation, accessed 14 May 2020.

[58].           Ibid.

[59].           Please note this is not discussed in any detail in this paper.

[60].           OECD, Tax Challenges Arising from Digitalisation – Report on Pillar One Blueprint, op. cit., p. 9 and OECD, 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 in January 2020  op. cit., p. 24.

[61].           OECD, Addressing the tax challenges of the digitalisation of the economy: Public consultation document, op. cit., p. 8.

[62].           Ibid.

[63].           Ibid.

[64].           See, Ibid., p. 9, which cited this was common for social media platforms, search engines and online marketplaces.

[65].           Ibid., pp. 10-11.

[66].           Ibid.

[67].           Ibid., p. 11 fn. 4—a marketing intangible is ‘an intangible . . . that relates to marketing activities, aids in the commercial exploitation of a product or service and/or has an important promotional value for the product concerned. Depending on the context, marketing intangibles may include, for example, trademarks, trade names, customer lists, customer relationships, and proprietary market and customer data that is used or aids in marketing and selling goods or services to customers.’ [citations omitted].

[68].           Ibid., p. 12.

[69].           Ibid., p. 13.

[70].           Ibid., pp. 14-15.

[71].           Ibid.

[72].           Ibid., p. 11.

[73].           Ibid., p.16.

[74].           See, ibid., pp.16-17, which notes that possible criteria for measuring significant economic presence could include sales volume, size of user base, volume of digital content, marketing and sales activities, maintenance of a website in the local language, after sales support services, and billing and collection in local currency.

[75].           Ibid., p. 20.

[76].           Ibid., p. 11.

[77].           OECD, Programme of work to develop a consensus solution to the tax challenges arising from the digitalisation of the economy: OECD/G20 inclusive framework on BEPS, p. 11.

[78].           Ibid., pp. 6-7.

[79].           Ibid.

[80].           Ibid., p. 7.

[81].           OECD, Secretariat Proposal for a “Unified Approach” under Pillar One, p. 5.

[82].           Ibid., p. 4.

[83].           Ibid., p .7.

[84].     This broadly refers to businesses can extract significant additional profit from a market, due to consumers in that country being prepared to pay a higher price due to the marketing intangibles attached to the product. The OECD cites examples as including luxury goods, automobiles, branded coffee and restaurant and hotel franchises.

[85].           Ibid.

[86].           Ibid., pp. 5 and 7-8.

[87].           Ibid., p. 8.

[88].           Ibid.

[89].           Ibid, p. 9.

[90].           Ibid., pp. 9–11.

[91].           See KPMG, Treasury opposition to digital services tax initiatives, support for Pillar One, 4 December 2019

[92].           OECD, 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, op. cit., p. 5.

[93].           Ibid., p. 5.

[94].           Ibid., p. 7.

[95].           Ibid., p. 11.

[96].           Ibid., p. 9.

[97].           Ibid., pp. 9-10.

[98].           Ibid., p. 10.

[99].     Ibid.

[100]. Ibid., p. 16.

[101]. Ibid., pp. 16-17.

[102]. Ibid.

[103]. Ibid., p., 8.

[104]. Ibid., pp.17-19.

[105]. Ibid., p. 11.

[106]. Ibid., p. 10.

[107]. Ibid., p. 11.

[108]. Ibid., pp. 9-10.

[109]. G DeSouza, INSIGHT: Are You on the OECD Pillar One Black List? The Winding Road Ahead, Bloomberg Tax, 3 March 2020.

[110]. See for example, N Khadem, Pharmaceutical companies accused of profit shifting not being taken to court, Sydney Morning Herald, 28 July 2015, which stated that ‘Mr Jordan told the Senate inquiry at a hearing earlier in July that pharmaceutical companies tended to be the ones that “back the profit out through pricing or royalties”. “The fact is that this industry does invest a huge amount of money in the development of drugs, some of which go nowhere and some of which are highly profitable,” Mr Jordan said. “The industry practice here has been to ensure that that type of function – the high-value-add function – is not part of any of the Australian operations.”’

[111]. OECD, Addressing the tax challenges of the digitalisation of the economy: Public consultation document, op. cit., p. 11.

[112]. G DeSouza, INSIGHT: Are You on the OECD Pillar One Black List?, op. cit.

[113]. This is notwithstanding that the issue of pharmaceuticals has been raised in OECD consultations, see for example, see, C O’Brien, TaxWatch: BEPS 2.0 Pillar One and Pillar Two, KPMG, accessed 25 June 2020, which states that, “Greater clarity is needed to determine which types of business sectors are considered to be in scope sectors that interface with consumers. A number of respondents expressed concern that, for example, businesses which interface with business customers but whose goods and services ultimately affect consumers could be in scope e.g. consumer pharmaceutical products distributed through hospitals and pharmacies. More work needs to be done in defining the business sectors that are in scope.”

[114]. A Brambilla and R Bravo, France, U.K. offer to limit digital tax scope after U.S. threat, op cit.

[115]. B Smith-Meyer, European tax czar: EU ready to launch digital tax if U.S. stalls talks,, 18 June 2020.

[116]. OECD, Tax Challenges Arising from Digitalisation – Report on Pillar One Blueprint, op. cit., p. 12.

[117]. Senate Economics, Senate Economic Reference Committee – Corporate Tax Avoidance, Official committee hansard, 18 November 2015, p. 52.

[118]. As discussed in Part B of this paper, countries also contend that these profits are also partially attributable to strong regulatory frameworks and infrastructure as well as domestic policy settings that may promote higher living standards and disposable income.

[119]. It should also be noted that countries may also argue that they are entitled to forego imposing these taxes in order to encourage increased business activity and international competitiveness, and such a decision should not allow other countries to impose tax on those profits. See J Drucker, How Tax Bills Would Reward Companies That Moved Money Offshore, New York Times, 29 November 2017, which contains a plain English summary of the United States former tax deferral rules which are one such example of this practice.

[120]. See KPMG, Treasury opposition to digital services tax initiatives, support for Pillar One, 4 December 2019 and H Van Leeuwan, Trump boycott fails to sway OECD, Europe on digital tax push, Australian Financial Review, 19 June 2020.

[121]. See E Asen, What European OECD Countries Are Doing about Digital Services Taxes, Tax Foundation, 22 June 2020 and  A Maslaris, France's Digital Services Tax, Parliamentary Library, Canberra, 9 August 2019.   

[122]. See, O Treidler, The OECD’s “no Plan B” approach on digital taxation backfires, MNE Tax, 22 June 2020. Also see, United States Government, Section 301 Investigation: Report on France’s Digital Services Taxes, United States Trade Representative, pp. 25-26, which states that roughly two-thirds of firms potentially subject to a French DST are from the United States—the United States estimates that 27 businesses will be captured by France’s DST, comprising of 17 from the United States, 2 from Japan and Germany and 1 from China, Spain, France, Norway, the Netherlands and the UK). The full list is replicated at Appendix B.

[123]. See the discussion above on this in Part B of the paper.

[124]. See for example, H Ellyatt, Europe stands firm on tech tax in the face of Trump’s tariff threats ... for now, CNBC, 23 January 2020, L Buchan, Trump administration threatens trade war with UK over digital tax plan, The Independent, 22 January 2020, and J Leonard, S Mohsin and A Weber, French handbags, wine and cheese are on Trump’s tariff list as the fight over digital taxes escalates, Fortune, 10 July 2020.

[125]. See for example, S Langbein, United States Policy and the Taxation of International Intangible Income, University of Miami Inter-American Law Review, 24 April 2019, pp. 9-10.

[126]. F Islam, Sunak urges US to back digital services tax, BBC, 18 June 2020.

[127]. H Van Leeuwan, Trump boycott fails to sway OECD, Europe on digital tax push, op. cit.

[128]. See, S Amaro, How the US election will shape digital tax talks is a ‘million-dollar question,’ OECD hopeful says, CNBC, 2 November 2020 and J White, Is Biden’s victory good news for the OECD digital tax talks?, International Tax Review, 12 November 2020.

[129]. See for example, BBC, OECD: No deal on digital tax risks trade war, BBC, 10 June 2020, B Glosserman, Digital taxes are the latest trade war battleground, Japan Times, 1 July 2020 and W  Horobin and B Bashuk, Why ‘Digital Taxes’ are the new trade war flashpoint, Washington Post, 19 June 2020.

[130]. D Klass, INSIGHT: Taxation in the Time of Covid-19 and the Post-Crisis Landscape, Bloomberg Tax, 13 April 2020.

[131]. E Walker, Spain proposes 3% digital services tax, Pinset Mason, 21 February 2020 and KPMG, Spain: Draft legislative proposal for digital services tax, KPMG, 19 February 2020.

[132]. PWC, Tax Insights: Italy’s 2019 budget law introduces a digital service tax, PWC, 19 February 2020.

[133]. Reuters, French tax on internet giants could yield 500 million euros per year: Le Maire, Reuters, 4 March 2019.

[134]. United Kingdom Government, Policy paper: Introduction of the new Digital Services Tax ,, 11 July 2019.

[135]. F Islam, Sunak urges US to back digital services tax, op. cit.

[136]. See for example, H Gold, US and France reach compromise on digital tax, CNN Business, 26 August 2019, which  notes that notwithstanding various threats made by the United States, a truce was reached when France agreed to pay back any taxes that a DST would raise over-and-above what would be raised under the OECD’s long-term solution.

[137]. See for example, J Tankersley, U.S. Will Impose Tariffs on French Goods in Response to Tech Tax, New York Times, 10 July 2020, which notes that the United States decision to impose 25% tariffs on certain French goods did not extend to French wine, as originally threatened, and would not apply until 2021 so as to ‘give both countries time to resolve their differences over a digital tax that will hit American tech companies’.

[138]. B Smith-Meyer, European tax czar: EU ready to launch digital tax if U.S. stalls talks, op. cit.   

[139]. OECD, Secretariat Proposal for a “Unified Approach” under Pillar One, October 2019, op. cit., pp. 5-6.   

[140]. OECD, 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 in January 2020, op. cit., pp. 22-24.

[141]. OECD, Secretariat Proposal for a “Unified Approach” under Pillar One, op. cit., p. 7.

[142]. For example, Australia’s definition of a Significant Global Entity (which did not expressly follow the OECDs model definition) has created a number of loopholes that arise in relation to when an entity may be subject to Country-by-Country Reporting, the Multinational Anti-Avoidance Law and the Diverted Profits Tax. See, Australian Government, Toughening the Multinational Anti-Avoidance Law, Treasury, 11 February 2018 and Australian Government, Extending the definition of a Significant Global Entity, Treasury, 13 November 2019.        

[143]. For example, consolidated financial statements are readily available, relied on by investors and the market (and therefore profits less likely to understated) and audited.

[144]. For a range of views on this topic, see for example, A De Zilva, The Alignment Of Tax And Financial Accounting Rules: The Case For A New Set Of Common Rules, Journal of the Australasian Tax Teachers Association, 2005; M D’Ascenzo and A England, The Tax And Accounting Interface , Journal of The Australasian Tax Teachers Association, 2005; Australian Government, Exploring the potential to align accounting and tax systems in Australia, Board of Taxation, July 2018.       

[145]. OECD, Secretariat Proposal for a “Unified Approach” under Pillar One, October 2019, op. cit., p. 14.

[146]. For example, despite Samsung and Apple undertaking significant litigation relating to their phones, it could be argued that for tax purposes the other’s business is not a reliable comparable because Samsung makes significant profits from whitegoods, and Apple from online platforms, each of which impact overall profit margins. 

[147]. O Treidler, The OECD’s “no Plan B” approach on digital taxation backfires, op. cit.

[148]. M Devereux and J Vella, What problems might the GloBE solve?, op. cit.

[149]. O Treidler, The OECD’s “no Plan B” approach on digital taxation backfires, op. cit.   

[150]. See for example, O Treidler, The OECD’s “no Plan B” approach on digital taxation backfires, op. cit.

[151]. Australian Government, The digital economy and Australia’s corporate tax system, Treasury, op. cit., pp.13-14.

[152]. United States Government, Section 301 Investigation: Report on France’s Digital Services Taxes, op. cit., pp. 25-26.


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