A key part of Pillar One is the removal of DSTs and other unilateral measures. The Progress Report on Amount A of Pillar One
reiterated this and stated that the multilateral convention on Amount A of Pillar One would include a requirement to withdraw all existing DSTs and relevant similar measures for all companies. Key points that flow from this include:
1. The requirement to withdraw DSTs applies to all companies. Currently, DSTs have a much lower threshold than Pillar One before they apply. This is because Amount A of Pillar One only applies where the revenue of the group is more than 20 billion euros
and the pre-tax profit margin of the group is more than 10 per cent.
Therefore the scope of DSTs is wider than Pillar One. However, the OECD indicated that all DSTs for all companies will have to be removed.
2. No future DSTs. The Progress Report also stated there will be a requirement not to enact DSTs (or relevant similar measures), where they impose taxation based on market-based criteria, are ring-fenced to foreign and foreign-owned businesses and are placed outside the income tax system (and therefore outside the scope of tax treaty obligations).
3. The definition of ‘relevant similar measures’. This was not defined but the Progress Report stated that it would not include value-added taxes, transaction taxes, withholding taxes treated as covered taxes under tax treaties, or rules addressing abuse of the existing tax standards.
The draft MLC provisions addresses these issues and implements the provisions relating to DSTs (and other relevant similar measures) in Articles 37 and 38 of the MLC.
Article 37 is relatively straightforward and provides that each party to the MLC will not apply any measures listed in an Annex to the MLC to any company. It will take effect on the entry into effect of the MLC for a jurisdiction.
The Annex, however, is not part of the public consultation and is therefore not included in the draft MLC provisions. However, the measures in the Annex are to be determined by the Task Force on the Digital Economy (TFDE).
The draft MLC notes that the OECD are considering whether any existing measure could continue to be applied against an MNE with a UPE located in a jurisdiction that is not a party to the MLC.
The draft Article 38 is more interesting.
Paragraph 1 eliminates Amount A
allocations for jurisdictions imposing a DST or relevant similar measure (or failing to withdraw an existing measure listed in Annex A).
It also prevents domestic jurisdictions from applying any tax on Amount A.
This means that the elimination of the Amount A allocation is not restricted to the measures listed in Annex A but applies to a digital services tax or relevant similar measure.
“Digital services tax or relevant similar measure” is then defined as a tax that is determined primarily by reference to the location of customers or users, or other similar market-based criteria and is:
– applied solely to persons that:
– are non-residents; or
– are primarily owned, directly or indirectly, by non-residents; or
– is applied in practice exclusively or almost exclusively to non-residents or foreign-owned businesses as a result of the application of revenue thresholds, exemptions for taxpayers subject to domestic corporate income tax or restrictions of scope that ensure that substantially all residents (other than foreign-owned businesses) supplying similar goods or services are exempt; and
– the tax is not treated as an income tax under domestic law or is outside the scope of any income tax double tax agreements.
The following are specifically not digital services taxes or other relevant similar measures and therefore do not impact on any Amount A allocation :
- provisions that target artificial structuring to avoid permanent establishment or nexus requirements that are based on physical presence ie digital permanent establishments;
- value added taxes, goods and services taxes, sales taxes, or other similar taxes on consumption; and
- taxes imposed on transactions on a per-unit or per-transaction basis rather than on an ad valorem basis.
Paragraph 4 of Article 38 then provides that there will only be a digital services tax or relevant similar measure in force if it is classed as such by the Conference of the Parties and it is also determined that it hasn’t been withdrawn.
Therefore, there will effectively be a two-tiered system. DSTs and other measures that are specifically listed in the Annex that have to be repealed and a separate residual provision that can prevent an Amount A allocation for other taxes that aren’t specifically listed in the Annex.
The OECD notes that they are considering the treatment of measures not included in Annex A but identified as DSTs and other relevant measures by the Conference of the Parties including whether they should be included in the Annex.
Digital Permanent Establishments and Digital Withholding Taxes
Article 38 expressly states that both digital withholding taxes and digital permanent establishments are not ‘DSTs or other relevant measures’. It is therefore to be expected that this would also flow through into the measures that are targeted for removal in the Annex to the MLC.
On this basis, jurisdictions that have these measures would not need to remove them. This would include:
|Congo||WHT on Video Streaming||10%
|India ||Digital WHT||1%
|Turkey ||Digital WHT||15%
Digital Service Taxes
The definition of digital service taxes above catches many of the global DSTs that have been introduced. This includes: