The BEPS project (Base Erosion and Profit Shifting) published by the Organisation for the Economic Cooperation and Development (OECD) in 2015, includes 15 Actions to tackle tax avoidance, improve the coherence of international tax rules and ensure a transparent tax environment. Action 1 addresses the tax challenges of the digital economy, as well as strategies and recommendations for the base erosion and profit shifting.

The present article just addresses the digital economy. After the publication of the BEPS project, the different OECD work departments have issued various reports to solve the questions that concern to the countries involved in this project.

During this year, in January 2019, the OECD issued a note that included different proposals grouped in two pillars: The Pillar One contains three proposals to apply the allocation profits at international level beyond the arm’s length principle used in transfer pricing matters.

For its part, the Pillar Two concerns the current BEPS documents.

The last report issued by the OECD Secretariat was on 9th October and it is currently open to a public consultation process. It encloses the main common points of the three proposals of Pillar One, which have been the base of this new proposal with a “Unified Approach”. It addresses the allocation profits and corresponding taxing rights to countries where MNEs have their markets. The OECD considers that this Unified Approach would ensure that MNEs conducting significant business in countries where they do not have physical presence, be tax in such jurisdictions.

The main features of the Unified Approach are the following:

  • Scope: The scope of this proposal is mainly focused on high digitalised business which are carried out from a remote location to the users (may or may not be primary costumers), and other business that markets they products to consumers and may use digital technology to develop a consumer base.


  • New Nexus: In general terms, the Unified Approach tries to establish a rule through which the companies that markets in a country where do not have physical presence, be tax in that country for the creation of value.


The new rule will apply to the business that has a significant involvement in the economy of a market jurisdiction, irrespective of its level of physical presence. In this sense, the Unified Approach proposes to establish a revenue threshold in order to determine if a company is relevant for this purpose.

This threshold would be applied also for groups of companies that sell in a market through a distributor (whether a related or non-related local entity). So, the OECD considers that would be important to ensure neutrality between different business models and capture all forms of remote involvement in the economy of a market jurisdiction.

  • New profit allocation rule: After determining if a company has to be taxed in a jurisdiction, the question is the amount that should be allocated in such jurisdiction.


Currently article 7 of OECD and United Nations Model Tax Convention, as well as article 9 of this Model define the rules related to the allocation of profits. However, the new rules proposed are out of the scope of these articles because of the absence of physical presence.

For that reason, the OECD intends to determine an appropriate amount to be taxed in a jurisdiction through these new rules of profits allocation, together with the current transfer pricing rules. For such purpose, The Unified Approach propose a three-tier profit allocation mechanism:


  • Level A: Application of a new taxing rights for the deemed residual profit.


  • Level B: All activities, include distribution functions, particularly, that are currently at issue, remain taxable with the current rules (transfer pricing, United Nations Model Tax Convention, etc.). However, the new rules could change this situation through the establishment of standard remunerations according to the functions performed.


  • Level C: According to the Unified Approach, any dispute between taxpayers and Tax Authorities over any element of the proposal will be subject to legally binding and effective dispute prevention and resolution mechanisms. For instance, these mechanisms will be required to justify the functions performed by the taxpayers when Tax Authorities intend to apply an extra tax if they consider that a taxpayer performs more functions than the ones indicated by the taxpayer.

In general terms, the Unified Approach proposed by the OECD Secretariat does not try to set the current law aside, but collaborate with this in order to get an appropriate taxation in the corresponding country.

This new proposal is still pending to be modified after receiving the comments of the public consultation (until 12th November 2019). A final drat is expected to be published at the beginning of 2020.

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