The OECD’s 2019 workplan on addressing the tax challenges of the digitalised economy looks set to be a major overhaul of the international taxation system.
It will have a far-reaching impact on multinational enterprises, whether or not they are heavily involved in digital business – including those operating in the oil and gas sector.
“Base erosion and profit shifting”, or “BEPS”, is the OECD programme, sponsored by the G20, to tackle perceived tax avoidance by multinational companies and to try to ensure that companies pay their “fair share” of tax.
The many actions from BEPS have made significant changes to the tax regimes of the OECD countries and had a material impact on how international groups conduct their tax affairs.
It has given rise to corporate interest restrictions, enhanced transfer pricing, anti-hybrid legislation and country by country reporting, to name but some of the changes.
However, as time went on, there appears to have been a collective realisation that incorporating these new rules within the tax regimes of the respective countries was still not going to be enough to address the fundamental disconnect between the existing framework of taxation for multinationals and the 21st Century digital revolution.
Taking a step back, the modern system of international taxation has its roots in the League of Nations, an organisation more famous for its failures than its successes.
The world economy of the 1920s was one where international trade was in tangible items, and conflicts between taxation at the source country and taxation at the host country were resolved by the model tax treaty to prevent double taxation developed by the League of Nations in 1928.
The ambition of the League to see a multilateral treaty signed by many countries was never realised, but equally the drafters could never have imagined that a vast network of bilateral treaties, drawn from the principles of the model treaty, would spring up from their efforts and be effective for the next 90 years.
What’s become clear is that the legacy framework of international taxation is not capable of dealing with international trade in intangibles nor situations where multinational groups can have extensive trading in countries where they have little or no physical presence, by virtue of e-commerce.
Against the threat of a proliferation of countries unilaterally introducing so called “digital taxes”, which are usually a straight levy on revenue, BEPS 2.0 has emerged.
BEPS 2.0 acknowledges the ineffectiveness of the 1920s concept of “permanent establishment” in the digital age and consequently proposes a radical and fundamental overhaul to the international tax framework.
The OECD Secretariat has adopted a two pillar structure, the first pillar dealing with the “Unified Approach” and the second with the concept of a global minimum tax.
Not only is the scope of the overall project large, the timescale is incredibly ambitious. A consultation document addressing the first pillar was issued on 9 October with a deadline for responses of 12 November.
That document includes proposals for a new nexus concept (i.e. a new set of rules as to when you will have a taxable presence in a country) which is not based on physical presence but more on sales, and a proposal for new rules on allocating the overall profit made between the home jurisdiction and the countries that a group trades in.
These changes strike at the heart of international tax structuring and the historic rules for allocating profits using transfer pricing methodologies, which in turn are based on economic principles. In that respect they are revolutionary.
It may be tempting to think that if you are not a tech giant these rules aren’t aimed at your business – but that is probably a false hope.
The consultation document suggests that the target for these changes are digital and consumer-facing businesses, but it is more likely that most international groups will be affected.
Given the definition of ‘consumer-facing business’ remains unclear, it would certainly be unwise to simply assume that you will not be within the gambit of the rules.
For the oil and gas sector, the consultation document notes that the extractive industries are assumed to be out of scope.
This will be important to developing countries to avoid a shift of taxing rights towards market countries away from the host country where the minerals are extracted.
However, it is currently far from clear how the carve out will work in practice. Areas of concern will be petrochemical and refined product sales, plus the oilfield service supply chain which the sector is dependent on.
EY is working to understand how these new concepts will affect various sectors and is engaging in discussion with our multinational client base, including those based in Aberdeen and beyond.
Derek Leith is EY partner and global oil and gas tax leader
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