BEPS Action 1: Addressing the Tax Challenges of the Digital Economy

BEPS Action 1 addresses the tax challenges arising from the digitalisation of the economy. Digital business models allow companies to have significant economic presence in a country without being taxable there.

• No standalone immediate measures – comprehensive analysis instead
• Three options discussed: significant economic presence nexus, withholding tax on digital transactions, equalisation levy
• Interim report in 2018 on further digitalisation issues
• Led to development of Pillar One (market jurisdiction taxing rights) and Pillar Two (global minimum tax)

The 2015 final report on Action 1 concluded that the digital economy cannot be ring-fenced from the rest of the economy, as it increasingly permeates all sectors. Concrete measures were distributed across the other BEPS Actions.

An interim report in 2018 presented three proposals for more market-based taxation: User Participation, Marketing Intangibles, and Significant Economic Presence. In January 2019, the OECD published a policy note on the two-pillar approach; in May 2019, the Inclusive Framework adopted the Programme of Work.

In October 2021, political agreement was reached on Pillar One and Pillar Two. In December 2021, the OECD published the GloBE Model Rules (Pillar Two). In December 2022, the EU adopted the Minimum Tax Directive (Directive 2022/2523). In October 2023, the OECD Outcome Statement reaffirmed the two-pillar approach and ongoing negotiations on the Pillar One Multilateral Convention (MLC).

Action 1 primarily concerns highly digitalised businesses with scalable business models without physical presence (e.g. online platforms, cloud services, digital advertising).

The successor solution Pillar One applies to groups with global turnover above EUR 20 billion and a profit margin above 10%, with the turnover threshold to be reduced to EUR 10 billion contingent on successful implementation. Extractives and regulated financial services are excluded from scope.

Pillar Two (GloBE) applies to MNE groups with consolidated annual revenue above EUR 750 million.

Action 1 conclusions (2015 analytical report):

• Analysis and monitoring of the tax implications of the digital economy
• Review of nexus and profit allocation rules

Successor framework requirements (Two-Pillar Solution):

• Pillar One: Reallocation of taxing rights to market jurisdictions for groups with global turnover above EUR 20 billion and profit margin above 10% (with the turnover threshold to be reduced to EUR 10 billion contingent on successful implementation)
• Pillar Two (GloBE): Global minimum taxation of 15% for MNE groups with consolidated revenue above EUR 750 million
• Coordinated removal of national digital services taxes upon implementation of Pillar One

2 corrections:
- Title incomplete: 'Addressing' missing from English title
- Incorrect description of three options from final report
3 updates:
- Pillar One threshold incomplete: reduction to EUR 10 billion missing
- Missing key milestones after October 2021
- Official URL may no longer be accessible (OECD website restructuring)
5 clarifications.
2 notes.