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The Office of US Trade Representative (USTR) opened an investigation into France’s DST in July on the basis that it was unfairly targeting a subset of US-based companies, which included Facebook and Google’s parent company Alphabet. Companies that provided comments ahead of a public hearing to assess the DST argued that France’s approach undermines jurisdictional taxing rights and the international tax framework.
The Organisation for Economic Co-operation and Development (OCED) has obtained the agreement of the 129 members of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) to a framework that sets out the process for reaching a new global agreement for taxing multinational companies.
Uber makes the case for a residual profit split
Fearing the chaos of unilateral measures, the popular ride-sharing app business has laid out a version of the residual profit split the OECD has explored as part of its pillar one proposals. The company stressed this is a “critical time for stakeholders”.
“Our proposal is based on a modified residual profit split (MRPS), with simplifying measures intended to mitigate the complexity associated with profit splits,” Francois Chadwick, vice president of tax at Uber explained in a recent article he wrote.
“It results in a reasonable reallocation of profit to market jurisdictions over and above traditional transfer pricing methods,” he argued.
After looking at the OECD proposals, the company “concluded that a modified residual profit was the best adapted [method] to address the largest tax challenges and the best suited to use as the basis for a principle-based solution”.
The Uber plan would start from the global operating profit of the multinational enterprise (MNE) in question. This figure would be taken from audited financial statements to ensure accuracy. However, the proposal allows for some flexibility.
“Taxpayers may have multiple lines of business that might experience very different financial results,” Chadwick said. “They should be allowed to apply the proposal separately to each line of business.”
The next step would be to remove routine profits, but this would be on a case-by-case basis. Instead, the routine profits would be singled out on a group-wide basis according to an amount equal to 4% of sales or 15% of depreciable and amortisable assets other than goodwill (taking into account the ratio of the entity’s value-added costs to total worldwide value-added costs).
Chadwick hopes this would reduce the complexity and propensity for disputes over the routine returns. The remaining profits after routine returns that are removed would provide an estimated amount of the group’s residual profits attributable to intangible assets.
This is where the residual profits are divided up between product intangible profit (PIP) and market intangible profit (MIP). The overall approach is to determine the taxation of a portion of the MIP to the new rules, while continuing to subject PIP and the remaining MIP to existing tax rules.
“The reason for that approach stems from the origin of the work to address the broader tax challenges created by the digitalisation of the economy, which was that existing tax rules failed to take into account the role that market externalities play in creating value in a digitalised economy,” Chadwick explained.
This would cover different levels of user participation, including the use of data from non-paying users to support advertising by paying customers and the ability to sell in one market while operating outside it.
It would divide the total MIP between the profits attributable to market externalities and the profits attributable to functions supporting the development, enhancement, maintenance, protection and exploitation (DEMPE) of market intangibles.
“Our proposal would treat 20% of total MIP as taxable MIP under the new taxing right,” Chadwick said. “We derived that 20% from economic analysis of the portion of profit appropriately allocable to market externalities.”
“Once taxable MIP is identified on a worldwide basis, the next step would be to identify the jurisdictions that are entitled to tax a portion of the group’s taxable MIP,” he added.
The MNE group’s net revenue would be sourced to the jurisdiction of ultimate use and consumption. This would mean determining the market-sourced net revenue on a local basis, where the customer is located.
Taxpayers would face an economic nexus threshold in each jurisdiction. The Uber plan specifies a €25 million ($27.7 million) threshold for market-sourced net revenues. However, this figure is intended as an example, so the thresholds could well be different.
The proposal would only apply to companies with global net revenues of more than €750 million a year. The hope is that this threshold would help reduce the complexity of managing two parallel tax regimes at the same time.
Uber is just the latest company to make an intervention in the OECD-led debate. Companies like Johnson & Johnson and Santander have made their contributions to this discussion, while a growing number of businesses are turning to the residual profit split as the least bad option.
What is different is that Uber is synonymous with the ‘gig economy’. This is the first time such a company has taken the risk of drafting its own proposal. The result may be that more businesses will take the bold step to drawing up policy.
The above article was published on www.internationaltaxreview.com on August 27 2019 and has been republished with the approval of the Publisher.