The Organisation for Economic Cooperation and Development (OECD) Secretariat has released an approach to address what it has termed the “tax challenges of the digitialisation of the economy.” The approach builds upon the Program of Work released on May 28, 2019, by the Inclusive Framework on Base Erosion and Profit Shifting (BEPS). Following consultations and input from interested parties, the OECD Secretariat developed what it calls the “Unified Approach” and which it hopes will be acceptable to all members of the Inclusive Framework on BEPS.

Because the Unified Approach is intended to achieve consensus among a diverse group of jurisdictions, it focuses on concepts rather than details. Much more is needed to turn the Unified Approach into a specific proposal that can be agreed to and implemented by the members of the Inclusive Framework on BEPS. As a next step, the OECD Secretariat will hold a public consultation on November 21–22, 2019, to receive input on the Unified Approach and the specific questions posed by the OECD Secretariat in its release of the Unified Approach.

Based on the information provided by the OECD Secretariat in its explanation of the Unified Approach, these are some of the significant issues that will need to be worked out in the next few months and are therefore likely to be discussed at the public consultation.

The size of the target

The Unified Approach is clear as to who is in the bullseye: “highly digitalised businesses that interact remotely with users, who may or may not be their primary customers, as well as other businesses that market their products to consumers and may use digital technology to develop a consumer base.” The question is which industries, companies and business lines will join them in the circles surrounding the bullseye. The Unified Approach suggests that the new tax rules generally ought to include “large businesses that generate revenue from supplying consumer products or providing digital services that have a consumer-facing element.”

Given that “consumer-facing” is undefined and consumer products are sold through a variety of channels, much discussion between market jurisdictions and taxpayers will be necessary to flesh out this concept. Ultimately, part of the resolution of the various issues will be political (e.g., countries will want certain types of taxpayers definitely included or excluded) and part will be due to practical considerations (e.g., certain size and revenue thresholds will be necessary if financial reporting is used as a component in the new tax rules).

Taking turns in an orderly way

The basic goal of the Unified Approach is to give market jurisdictions a greater share of taxation rights. Given the number of interested jurisdictions, there has to be a basic agreement as to who participates—and when—in the new taxing rights.

The Unified Approach suggests adoption of a revenue threshold before a market jurisdiction could exercise its new rights to tax. Still, much would have to be clarified before its impact could be determined:

  • Which marketing and distribution activities and revenues would count for purposes of the threshold, and how the threshold would apply to a related group of companies, would have to be identified.
  • The threshold would have to be adjusted to reflect the size of the market; otherwise small market jurisdictions would be excluded.
  • It is not obvious how the threshold would be measured, given that some revenues (such as advertising revenues) may not occur in a market jurisdiction.

To ensure that no market jurisdiction is worse off under the new rules, the new rules would apply in addition to the rights that the market jurisdiction otherwise has (e.g., if the jurisdiction currently can tax business profits due to a permanent establishment in that jurisdiction).

Dividing the winnings

The Unified Approach divides the new taxing rights into three groups, code-named “Amount A,” “Amount B” and “Amount C.”

  • Amount A would be the basic new taxing right for market jurisdictions. First, the new taxation right would not require any physical presence in the market jurisdiction by the company (or group) being taxed. Second, the new taxation right is linked to sales and divorced from the traditional arm’s length analysis that the market jurisdiction would otherwise have to undertake. Rather, a company (or a multinational group) would determine its “residual profit” (its remaining profit after allocating a specified return to certain “routine” activities), possibly on a regional or business line basis, and then split that residual profit (according to a to-be-developed formula) between the market jurisdiction(s) and the other jurisdiction(s) in which the residual profit is earned.
  • Amount B would be an enhanced taxing right for market jurisdictions, focused on distribution functions. It is supposed to be consistent with the arm’s length principle, but it would adopt simplifying conventions regarding remuneration and baseline activity.
  • Amount C would be an opportunity for a market jurisdiction to invoke traditional arm’s length pricing to tax an amount greater than the formula-driven Amount B.

The Unified Approach acknowledges that measures to prevent double (or multiple) taxation are necessary, as well as measures to deal with losses. Of course, coming up with workable proposals is another matter.

When the competition starts

Implementation of taxing rights this novel and significant would be a challenge in any case. Given the controversy over unilateral actions by market jurisdictions, the timing and manner of implementation will be very politically sensitive. The Unified Approach notes that the new taxing rights need to be implemented simultaneously by all jurisdictions to ensure a level playing field. Countries that have shown recent reluctance to join multilateral tax agreements, such as the United States, will pose a challenge not just for themselves but for all countries hoping to implement the new system smoothly.


The solutions suggested in the Unified Approach—departing from the permanent establishment standard, adopting new nexus rules based on revenue in a market, creating new profit-allocation rules—will fundamentally alter international tax rules. That is intentional: the Unified Approach reflects a widely shared view among countries that the “old” international tax rules are not working in this context. Accordingly, an exception to those rules must be created to deal with companies providing goods or services from a source outside the market jurisdiction.

This is a revolutionary change, and revolutions are rarely neatly contained. Lines will be drawn in the new rules to reflect political compromises, and there is no reason to expect those lines to stay where originally drawn. Lines will shift as political interests inevitably shift. Further, given the compromise nature of the expected final approach, there likely will be no principled or policy reason for keeping the new taxing rights limited solely to the industries, companies and business lines covered by that approach. The Unified Approach seeks to create a blueprint, and countries (whether individually or in groups) will do with that blueprint what they will.