The OECD Borrows a Page from SCOTUS’ Tax Playbook

The U.S. Supreme Court (SCOTUS) had its Wayfair moment in June 2018. The Organization for Economic Cooperation and Development (OECD) followed suit last month.

Re-Alignment of Global Tax Policy & International Tax Rules

On Oct. 9, the OECD published a 21-page public consultation document that describes a tax reform proposal from the OECD Secretariat (the division that carries out the OECD’s policy work) for a “Unified Approach under Pillar One.” This document represents the latest chapter—a pivotal one, to be sure—in the sweeping revision and re-alignment of global tax policy and the operative international tax rules the OECD has been working on for some years. Together with its comprising Pillar Two, they constitute a global re-architecture of international tax rules, not seen since the early 20th century.

In its South Dakota v. Wayfair decision, SCOTUS abandoned the long-standing physical presence standard for determining nexus. The OECD, as its public consultation document makes clear, also envisions a new global tax framework in which remote sellers operating beyond state and country borders are taxed by the countries in which their customers live according to specific sales thresholds.

Nexus & "Digital" Presence

The proposal represents an expanded form of unitary taxation on a global scale, as both formulary apportionment and jurisdictional profit allocation methods are inevitably included. However, the taxable presence, or nexus, under the proposal is a “digital” presence instead of being strictly physical. This is an application of a virtual permanent establishment (PE) pretense based upon digital sales and commercial footprints, leading to jurisdictional economic and business activity. That said, the processes for making this momentous shift still need to be detailed and clarified.

The 2 Pillars of the Global Tax Policy Revision Effort

The OECD detailed the tax challenges of an increasingly digital economy as a primary focal point in its 2015 BEPS Action Plan. A subsequent document published by the G20 Finance Ministers (working in concert with the OECD) in March 2018, Tax Challenges Arising from Digitalization – Interim Report, examined this issue in more detail. And then a joint OECD/G20 Inclusive Framework earlier this year grouped the global tax policy revision effort into two categories: Pillar One, which includes user participation, marketing intangibles, and significant economic presence proposals; and Pillar Two, also referred to as the “Global Anti-Base Erosion” or “GloBE”, which focuses on other BEPS-related expanding issues, such as an “alternative” minimum global tax for multinational organizations.

As MNE founder and editor Julie Martin reports here, the OECD also released a consultation document concerning Pillar Two earlier this month. In another new MNE article, “The OECD’s ‘Unified Approach' to digital taxation,” I offer some additional observations and insights on the new Pillar One proposal—and just how “inclusive” the Inclusive Framework really is.