OECD Digital Taxation Initiative 2020
In March 2019, the Organization for Economic Co-operation and Development (OECD) launched a major public consultation on the development a multilateral digital taxation framework for global application (i.e. not just by OECD nations).
This ambitious project, involving 137 countries and jurisdictions, could change the entire international tax system and has potentially serious implications for international shipping.
Initially, the main focus of the initiative was to reach a global agreement for taxing highly digitalised multinational companies, such as Amazon, Google and Apple. However, divergent views among the countries involved led to the scope of the initiative being extended significantly, potentially to cover all internationally operating businesses. This includes the shipping industry, where it has previously always been accepted practice that shipping companies engaged in international trade should only be taxed in their home state, as enshrined in the ‘shipping article’ (Article 8) of the existing OECD and United Nations Model Tax Conventions.
ICS has been working to achieve a ‘carve out’ for shipping from the OECD’s proposed global digital tax regime, which threatens the established principle that shipping companies should only be taxed in their home country.
Two main pillars have been identified as a basis for the new OECD agreement:
- Pillar 1 seeks to introduce a framework to determine where tax should be paid and on what basis. This includes what portion of profits should be taxed in those jurisdictions where customers are located.
- Pillar 2 seeks to develop a system to ensure that companies or industries to which the tax applies, should pay a minimum level of tax.
‘Digital’ taxation is a somewhat misleading term as these radical plans are not restricted to digital services. Pillar 1, in particular, could potentially apply to all multinational companies with “consumer-facing businesses”. However, industry wide exemptions
from both pillars remain a possibility, on a case by case basis, subject to agreement among the nations involved. ICS, alongside a number of other industry associations, has therefore been leading discussions with the OECD on behalf of the global shipping
industry, making the case for an exemption or ‘carve out’ under both pillars. This included a productive meeting with senior officials within the OECD Secretariat, in Paris, in October 2019. Following this meeting, ICS co-ordinated the provision of detailed information about how international shipping operates, to address various technical questions made by the
OECD in response to the industry’s request for a carve out.
Positively, in January 2020, the OECD released a statement indicating that shipping (and aviation) might be exempted under Pillar 1, based on the longstanding practice that exclusive taxing rights over international shipping and airline profits are assigned to the country of residence. More complex technical discussions between the industry and the OECD have also been ongoing regarding Pillar Two, and no final decisions have been made with respect to exemptions under either pillar.
A final agreement had been expected in July 2020, but the COVID-19 outbreak and divergent views among the nations involved – including strong resistance by the United States due to the disproportionate impact of Pillar 1 on US companies – means that key political decisions about the OECD blueprint are not expected until October 2020 at the earliest. In the meantime, ICS national shipowner associations have been encouraged to liaise with national tax and finance authorities participating in the OECD negotiations.