Clarity in a cycle of complexity

Why should a “non-digital-born” company be concerned about digital tax? It’s a valid question. Simply stated, if your company is consumer facing and sells into jurisdictions remotely, either directly or indirectly through a third party, you may trigger what is considered the “new nexus.”

Many taxpayers that operate in traditional, supply-chain-based business models rightfully tuned out of the OECD’s earliest discussions of digital tax, thinking it was exclusively for “digital-born” taxpayers. However, the scope defining the net of digital tax captured by the “new nexus” has broadened beyond highly digitalized companies to potentially include what we would consider “non-digital-born” organizations that are either directly or indirectly consumer facing. Therefore, in anticipation of an accelerated digital tax implementation as soon as FYE 2021/2022, the time to act is now. We encourage tax departments to conduct as soon as possible a “new taxing right readiness review” and to discuss the potential scope of the new taxing right as it applies to their business flows and the inherent need that will follow for detailed segmented financial data with their CFO and CTOs, respectively.

We are on the front lines of the digital tax issue, having participated in the various OECD public hearings in Paris, submitted public comments to the Secretariat proposal on the Unified Approach under Pillar One, and published an article for TEI with practical recommendations. We are tracking the digital tax evolution closely to ensure that our clients are not caught by surprise from an OECD solution that may have an accelerated, and burdensome, mandate for taxpayers.

The OECD framework is intended for companies with a multi-sided platform, both digital-born and non digital-born, and is comprised of five building blocks, representing the theoretical challenges as well as practical implementation hurdles. We have created the following framework to better understand the five building blocks namely: scope, nexus, profit allocation, elimination of double taxation, and dispute prevention and resolution.



The Secretariat has expanded the scope of the digital tax to include all consumer-facing business. There are potential issues and question that may arise for this widened breath of companies that have some element of digital capability within their supply chain (e.g., online sales, deployment of data). Based on the premise that the scope for the new taxing rights is defined by a business flow (e.g., tangible, intangible, or service) that is ultimately consumer facing (e.g., directly or indirectly) in the absence of traditional nexus (e.g., physical presence), the implementation challenges for taxpayers lie in defining the subtle nuances found when interpreting this scope (qualitative parameters) and the threshold (quantitative parameters) and the potential industry and market adjustments needed to account for such differences. Most organizations will not have the financial data available to meet the compliance requirements and will need to immediately address systems modifications required to generate the appropriate segmented financial data and cost allocation adjustments.


The next step in this analysis contemplates whether identified revenue streams are sufficiently connected to a local market, confirming whether the new nexus exists by jurisdiction. To validate the presence of the new nexus, it must be determined if an enterprise has “sustained and significant involvement” in a local economy in the absence of a physical presence.

Given the multiple levels of distribution that may exist within an organization’s supply-chain, the task of identifying the jurisdictions in which revenue arises is not straightforward. The identification of the primary points of distribution should be manageable but it is more convoluted once you consider secondary points of distribution (e.g., activities conducted through third parties). This identification could become very complex and require a detailed mapping and understanding of the nature of your related and unrelated consumer-facing business flows.

Profit Allocation

Although the Secretariat has arguably maintained the foundational aspects of the arm’s-length principle, the Unified Approach nonetheless embodies a departure from the arm’s-length principle with respect to the new taxing right itself. It will be up to the intricacies defined in the final version of the Unified Approach that will determine whether the arm’s length principle has indeed been sustained as the cornerstone of transfer pricing. Under this framework, three types of taxable profit are potentially available for allocation: A, B, and C, whereby A represents the new taxing right, which is derived from factors outside of traditional transfer pricing conventions, otherwise covered under B and C.

Our interpretation of the Secretariat’s 2019 Unified approach can be found in our article published by TEI with practical recommendations. We will review and adapt depending on further clarification from the Secretariat in the coming months.

Double taxation

Since the Unified Approach may embody a departure from the arm’s length principle with respect to the new taxing right itself, this approach may fundamentally change the international tax framework. As such, it is crucial that these changes will be implemented simultaneously by all jurisdictions to avoid double taxation. Furthermore, at the level of the approach itself, there is a risk of double taxation at various levels: the potential overlap within the interaction among the amounts A, B and C;  the potential differences in view between jurisdictions on the allocation formulas for amount A, and dispute on the characterization of the distributor (amount B).

A mechanism will have to be put in place, to limit the exposure to double taxation as much as possible which brings us to the fifth building block, dispute prevention and dispute resolution.

Dispute Prevention and Resolution

In order for the Unified approach to be a success, the focus should be on the development of a robust and administrable global dispute prevention mechanism. As an example, a mechanism where the parent’s company’s home country tax administration would become responsible for the global coordination of Amount A (including the calculation, the audit of the calculation or even the collection and allocation of the taxes) could be a strong tool in limiting disputes.

Moreover, there is a need for a robust, binding multilateral dispute resolution mechanism, including some type of binding mandatory arbitration across all participating jurisdictions to minimize controversy time and costs for the multinational companies.