How BEPS 2.0 Unified Approach Will Revolutionize Business Models

With its new proposal (published October 9), the OECD tries to answer one burning question:

How can profits and corresponding taxing rights on cross-border activities performed by multinationals be (re)allocated to cope with the ever-changing business models of the 21st century?

The OECD's objective is to build a consensus by the end of 2020 on international tax challenges arising from the digitalization of the economy and the remaining BEPS issues. This proposal is set to change some fundamentals of the current international tax system, in particular, the notion of permanent establishment and the arm's length principle.

Will your company be impacted?

Most likely, yes! As the proposal recognizes that transfer pricing and profit allocation are of broader relevance beyond that of digitalized business models, these changes in the tax system will affect more than just highly digitalized multinationals so that all taxpayers may be targeted by this initiative.

For the first time, the Proposal addressed the possibility to carve out certain industries such as financial services (which will undoubtedly be on the Luxembourg market's radar). With no consensus yet, however, the question remains: Will already highly regulated asset managers, banks and insurance companies be exempt?

Unified Approach - a radical paradigm shift

Key to understanding the impact of the "Unified Approach" is to recognize that while the three solutions (User Participation, Marketing Intangibles and Significant Economic Presence) in Pillar One of the initial consultation paper seemed different at first glance, there was a clear consensus on the following points:

Intent to reallocate taxing rights in favor of market jurisdictions Creation of a new nexus rule that no longer depends on physical presence in the local market Solutions that go beyond the arm's length principle Drive for simplicity and increased tax certainty for multinationals Three aims of the Unified Approach

A new sales-based nexus that could impact all sectors A company which sells in a local jurisdiction without physical presence today will be taxed tomorrow. Take, for instance, industrial companies that provide customers with a direct online ordering system to improve their lead to delivery and enlarge their distribution capabilities.. While they currently have no physical presence in their customers' markets, the new nexus will likely recognize value (and therefore a taxable basis) in those countries.

A new...

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