New OECD Proposal for Taxing Digital Economy – The Israeli Tax Angle
17 October 2019
On October 9, 2019, the OECD released a Public Consultation Document, the Secretariat Proposal for a Unified Approach under Pillar One (the “Unified Approach”). If implemented, the Unified Approach would bring significant changes to international taxation rights and would impact many multinational companies with online activities, by providing market countries with taxing rights.
Several countries have been taking unilateral measures to address the taxation of non-resident companies’ activities over the Internet. The Unified Approach is intended to provide a consensus among countries on this issue in an attempt to adopt a harmonized approach to taxation of digital activities. Recognizing that the allocation of taxing rights can no longer be exclusively circumscribed by reference to physical presence, the Unified Approach is based on the following elements: scope, economic nexus, a new approach to profit allocation and binding dispute resolution.
In terms of scope, the Unified Approach covers mainly (but not only) highly digital companies, with a broad focus on consumer-facing businesses (sales of goods or provision of digital services that are consumer-facing). Under the Unified Approach, economic nexus is no longer dependent on physical presence in order to acquire taxation rights over a non-resident taxpayer’s revenues from digital activities. Rather, economic nexus can be established based on a certain sales threshold (adjustable based on the size of a particular market to ensure smaller markets get their fair share), while taking into account additional factors such as online advertising targeted at a specific market. The economic nexus concept would be introduced by incorporating a standalone treaty provision into the OECD Model Convention.
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