The core content of the Tax Base Erosion and Profit Transfer Project (BEPS) led by the Organization for Economic Cooperation and Development (OECD) aims to meet the tax challenges brought by the digital economy.
In January 2019, OECD member countries reached a consensus on the two-pillar proposal under the BEPS project. In May of the same year, the G20 approved the relevant work plan. In July 2020, the G20 authorized the OECD to prepare the "Pillar I/II Blueprint" report. On October 15th of the same year, OECD released the report "Tax Challenges Brought by Digitalization-Pillar One/Two Blueprint" (hereinafter referred to as "Report"). This paper analyzes the core viewpoints of the Report and puts forward some policy suggestions to build and improve the digital economy.
First, the core view of Two Pillars under BEPS project
In 2012, the meeting of G20 finance ministers and central bank governors proposed that in order to meet the tax system challenges brought by the digital economy, OECD was specially entrusted to carry out relevant economic analysis and impact assessment, and the Report came into being at the right time.
(A) Pillar I focuses on the distribution mechanism of taxation rights that matches the digital economy.
With the vigorous development of digital economy, the distribution of tax rights related to corporate profits is no longer limited to corporate entities. The first pillar mainly discusses the distribution mechanism of taxation rights matching with the digital economy, aiming at expanding the taxation rights of market jurisdictions (users’ locations). Pillar one divides the taxable profits of multinational corporations into three categories based on the tax linkage (significant figures exist) rule: category A is the share of residual profits allocated to market jurisdictions at the group level or business level of multinational corporations, mainly including automated digital services and consumer-oriented businesses; At the same time, the combined income of multinational companies and the income obtained abroad must be higher than a certain threshold value, respectively, in order to apply category A. Class B refers to the fixed returns of basic activities such as marketing and distribution activities that actually take place in the market jurisdiction of multinational companies based on the principle of independent transactions. Category C refers to the extra profits created by multinational companies engaged in activities that are not within the scope of basic activities in the market jurisdiction.
Class a mainly includes Automated Digital Services,ADS) and Consumer-facing Businesses,CFB). ADS is presented in three dimensions: positive list, negative list and general definition. The positive list includes nine types of services, namely, online advertising service, selling or otherwise transferring user data, online search engine, social media platform, online intermediary platform, digital content service, online games, standardized online teaching service and cloud computing service.
The negative list includes five types of services: customized professional services, customized online teaching services, online sales of goods and services other than advertisements, sales revenue of physical goods regardless of network connection, and services for accessing the Internet or other electronic networks. The general definition refers to other service types that are not listed in the positive list or negative list, but meet the general definition.
CFB is a business that generates income by selling goods and services to consumers, that is, buying goods for personal use instead of commercial or professional purposes, including applications in specific departments and business models of pharmaceuticals, franchising, licensing, dual-use goods/services and dual-use intermediate products and components.
In addition, Pillar I points out that specific natural resources, financial services, construction, sale and lease of residential properties, and international aviation and shipping business do not belong to Class A business types.
Calculate and determine the taxable amount in different market jurisdictions of Class A step by step. Pillar 1 points out that it is necessary to first determine that the total global income of multinational companies exceeds a certain upper limit, and at the same time, it is necessary to determine that only the total income of foreign sources from activities within the scope exceeds a certain upper limit can be included in Class A consideration.
Based on this, the pre-tax profit of multinational companies is determined by combining financial statements, and whether the profit rate exceeds the threshold value is calculated. If it exceeds the threshold value, the excess part is calculated, and the redistributed tax base is calculated according to the redistribution ratio, and the redistributed tax base is divided according to the market income ratio of different countries, and finally the taxable amount of each market jurisdiction is obtained.
(B) Pillar II focuses on solving the problems of surplus profit transfer and tax base erosion, ensuring that large multinational enterprises must pay the lowest level of tax.
Pillar II is applicable to multinational enterprises with consolidated annual income of 750 million euros or more in the previous fiscal year or close to the equivalent local currency, so as to avoid adverse impact on SMEs. Among them, investment funds, pension funds, government entities, international organizations, non-profit entities and entities restricted by the tax neutrality system may be excluded from the scope.
Pillar II has formulated a number of interrelated rules, such as income inclusion rules and conversion rules, low-tax payment rules and taxable rules. At the same time, it also defines the connotation of coverage tax rate and clarifies the calculation method of effective tax rate, all of which are aimed at coping with the risk of enterprises transferring profits to tax-free or low-tax countries, ensuring the competitive environment and transparency, and helping to reduce the compliance cost of enterprises.
Income inclusion rules and conversion rules
According to the income inclusion rules, if the local applicable effective tax rate is lower than the minimum tax rate, the country where the parent company is located can tax this income to ensure that the income of multinational enterprise groups is taxed at the minimum tax rate.
The conversion rules stipulate that if the profits of the parent company’s overseas permanent establishment enjoy tax exemption treatment, the profits and tax distribution of the tax-exempt permanent establishment should be distributed to the local jurisdiction of the permanent establishment. If the low effective tax rate abroad is applied to these profits, the conversion rules will allow the local jurisdiction of the permanent establishment to change the tax exemption law into the credit law in the tax treaty to ensure that the income is included in the implementation of the rules.
Low tax payment rule
This rule stipulates that the source country does not allow the payer to deduct the money before tax if the tax rate applicable in the other country is lower than the minimum tax rate. The low tax payment rule ensures that no tax will be distributed to countries whose effective tax rate is lower than the minimum tax rate, and the tax will be calculated and paid according to the applicable domestic tax rate.
Taxable rules
This rule requires certain types of payment to pay withholding tax or other taxes at the source, and when the applicable tax rate for payment is lower than the minimum tax rate, some income items are not applicable to deductible tax preferences. This rule is a supplement to the income inclusion rule, conversion rule and low tax payment rule, which is helpful for source countries (especially countries with low administrative ability) to protect the tax base and ensure tax certainty.
Coverage tax
This tax refers to the tax on the income or profits of the whole group company, including domestic tax and foreign tax on the company’s profits, but sales tax, value-added tax, consumption tax, stamp duty, employment tax and property tax are not covered taxes.
Coverage tax is mainly to solve the following four problems:
First, try to be consistent with the global tax base and avoid double taxation. Because the global tax base covers a wide range of income, the calculation of the global effective tax rate (ETR) must adopt the broader definition of coverage tax to adapt to the current and future tax design.
The second is to provide clear and consistent results. Due to the strengthening of tax compliance and administrative supervision, the rules of coverage tax are transparent and the principles are clear, which can ensure consistent and predictable results.
The third is to prevent legal analysis of specific tax technology design in different tax jurisdictions. Coverage tax focuses on the basic characteristics of taxation, avoiding the necessity of legal analysis of specific technical details of taxation in various tax law jurisdictions.
The fourth is to solve the difference in tax collection time. Coverage tax takes into account the influence of temporary differences between income recognition and taxation, which is convenient for simultaneous taxation on a global scale.
Effective tax rate
When the tax rate in the jurisdiction of the place of business is lower than the established minimum tax rate, multinational companies will have global tax obligations and need to clearly apply the effective tax rate. The calculation of effective tax rate includes two steps:
The first step is to determine the income of each entity in the group and make adjustments to the consolidated items at the entity level; The second step is to distribute the income and taxes paid by entities in each jurisdiction, that is, the adjusted total coverage tax [1] divided by the pre-tax profit (or loss) allocated to that jurisdiction. If the total pre-tax profit allocated to a jurisdiction is zero or negative (i.e. loss), the multinational corporation group will have no global tax obligation related to that jurisdiction in that year.
Second, the countermeasures and suggestions
Real-time tracking research on OCED dual-pillar scheme. Pay close attention to the latest development of digital economy taxation in OECD, EU and other countries, keep track of the latest reports and research results, and combine the details of various issues under BEPS "double pillars" to deeply study the behavior test, threshold test, connectivity test, income source and so on in the taxation scope.
Actively participate in the research and formulation of international tax rules
Based on the business characteristics of Internet enterprises in China, we will speed up the establishment and improvement of cross-border VAT jurisdiction rules on digital services and products, explore ways to define digital products and services more clearly through positive lists, and put forward a "China Plan" from a more rational and fair perspective.
Focusing on the rules of permanent establishment, transfer pricing, VAT tax jurisdiction, cross-border VAT management, etc., we should refine the landing rules as much as possible for enterprises to judge and operate, and at the same time, consider the core technical value of enterprises, and make every effort to ensure that the redistribution of global profits is beneficial to China’s tax base.
Conducting multilateral and bilateral dialogues on digital taxation.
Make full use of global or regional tax coordination platforms such as the Global VAT Forum, the United Nations Committee of Experts on International Taxation, the OECD Tax Administration Forum, the BRICS Tax Directors’ Meeting and the Belt and Road Tax Administration Cooperation Forum, establish an international digital tax dialogue and cooperation mechanism and a dispute resolution mechanism, improve the transparency of tax-related information, and create a fair and stable tax environment for China Internet companies to explore the international market.
Explore and improve the rules of tax linkage
Drawing on the experience of OECD, we should establish new linkage rules on operating income, user scale and other indicators, speed up the adjustment of the criteria for identifying "permanent institutions" of non-resident enterprises in the digital economy, and at the same time construct new tax linkage rules suitable for resident enterprises in the digital economy, and explore strengthening tax coordination of digital economy enterprises operating across regions according to the new tax linkage rules.
(The authors Cang Lan, Zhang Shucui, Meng Fanda and Xie Yuqi are from CCID CCID Research Institute)
关于作者