BEPS 2.0 – Focus and Measures

Steve Blough: One question we get asked a lot is, what is the importance of market intangibles? Why does the phrase “market intangibles” come up a lot in discussions about BEPS 2.0 and where it’s going? This really comes from a broad concern that current rules do not attribute enough profit of a multinational enterprise to the market jurisdictions to where their customers are located.

This has, in some sense, two flavors to it:

1. In the case of highly digitalized business models, such as for example a social media company, this is the idea that there should be taxing rights in a country where they have many users—where there’s a lot of user participation—even though there’s no physical presence in those countries. So, folks who follow this line just believe that those users are creating a lot of value for those companies, yet they don’t get any taxing right in their jurisdiction, and they want to change the rules to attribute some portion of profit to the users in those countries and, therefore, generate a taxing right around it.
   
   
2. This fits into, is complimentary to really a broader concern that has been out there, which is regardless of digitalization or not of business models, the view that access to the large customer base in a country is very important to generation of profits and that the profits associated with the customer base, with local customers, needs more profit associated with it. And, therefore, they want to change the rules to put more profit there, relative they’re ability to tax.

So, both of these come around this idea of market intangibles. I think it’s very important to understand that that is a broader concept than the current definition of marketing intangibles within the OECD guidelines. It really is a broader view of the market, and so there is a reason why the rules would need to be changed to allocate more profit to this.

OECD BEPS 2.0 measures

The OECD is considering measures to address these issues under two pillars, Pillar One and Pillar Two. Pillar One is this idea of expanding taxing rights or changing taxing rights based on some expanded nexus idea so that, for example, highly digitalized businesses would be subject to tax in jurisdictions where they have users regardless of physical presence as well as adjusting the determination of how much profit is taxable in market jurisdictions.

Pillar Two is more of a minimum tax concept to look at the overall tax paid by a company, looking at the amount of income it records in very low tax jurisdictions and putting in measures to mitigate that, such as a global minimum tax, which might be like the GILTI regime in the U.S., as well as potentially some sort of base erosion provision similar to the U.S. BEAT.