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What is the Unified Approach proposal of OECD?

What is the Unified Approach proposal of OECD?

Tag:GS-3||Economy|| External Sector|| International Tax Issues

What is the issue?

  • The Organisation of Economic Co-operation and Development (OECD) has released a consultation paper proposing changes in the rules for taxing Internet giants such as Facebook, Apple, Google, Netflix,
  • The proposal is called the “Unified Approach” and it will shift the standard of taxation from physical presence to sales in a particular market.

What is OECD?

  • The Organisation for Economic Co-operation and Development (OECD) is an international economic organization.
  • Foundation: It was founded in 1961by 18 European nations, and the United States and Canada to stimulate economic progress and world trade.
  • It now has 36 membercountries that are mostly high-income, free-market economies. India is not a member of the OECD.
  • Their goal is to shape policiesthat foster prosperity, equality, opportunity, and well-being for all.

Why there is a need for new taxation laws?

  • Global Battle: The current international battle over how to regulate the digital economy also needs to be resolved.
  • “Highly digitalized businesses” are now able to operate remotely and have high profits.
  • Most businesses have moved their income to low-tax countries like Ireland.
  • The proposal would give countries with many users of such business models new taxing rights.
  • India is one of the countries on which a significant economic presence model is based.
  • If the new OECD proposal is accepted, companies in the markets in which they sell more will have to pay more taxes.

How the new rule will be designed?

  • The key to the proposal is the sales-based “new nexus.”
  • “Nexus” in global taxation-refers to the existence of a corporation in a country that makes it taxable.
  • The new nexus principle will address this issue by enforcing it in all situations where a corporation has a major business jurisdictional position in the economy regardless of its physical presence in that jurisdiction.
  • The proposal proposes the design of a new rule and the determination of significant jurisdictional involvement by setting a market revenue threshold.
  • It considers a 750-million-Eurorevenue threshold.
    • This would allow the rule to encompass those who enter the market through a distributor.
    • It also means that the ruleswould apply not only to large multinational tech companies but to any company with an online presence.
  • The proposal focuses on large consumer-facing businesses, broadly defined as businesses that,
    • Provide revenue from the supply of consumer products or
    • Provide digital services with an element of the consumer’s face.
  • This definition will be further articulated, but its recommendation exempts companies such as oil companies from resource extraction.

Key concerns

  • The biggest problem is the arbitrary separation between what OECD calls “routine” and “residual” profits, and the proposal that only residual profits will be subject to unitary taxation.
  • This has no economic justification since profits are anyway net of various costs and interest.
  • Another concern is about the formula to be used to distribute taxable profits. The OECD suggests only sales revenues as the criterion, but developing countries would lose out from this because they are often the producers of commodities that are consumed in the advanced economies.

What’s next?

  • The proposal leaves unanswered many questions-in particular, how much profit the country should receive.
  • Finally, the option of this sum must arise from a political agreement that must be appropriate to all members of the inclusive system, small and large, existing and new.
  • Stakeholders can submit their responses by November 12, 2019.
  • Authorities expect to agree on a new tax system by the end of 2020.
  • In the near future, the finance ministers of the G20 would discuss this plan, and countries in favour of new laws could then start negotiations.

Way forward for India

  • It is important for the Indian government to look at this issue seriously and take a clear position at the OECD meeting because the outcome will be very important for its own ability to raise tax revenues.
  • A government that is currently ineffective in battling both economic slowdown and declining tax revenues cannot afford to neglect this crucial opportunity. But more public pressure may be required to make the government respond.

Mains model question

  • OECD has proposed that profits of MNCs should be available for taxation in the country where their customers are, irrespective of any physical presence in that market. Discuss