Canada: OECD Releases Proposal For "Unified Approach" Under Pillar One For Addressing Taxation Of The Digital Economy

Last Updated: October 29 2019
Article by James Meadow

On October 9, 2019, the Organisation for Economic Co-operation and Development (OECD) issued its proposal for addressing the tax challenges of the digital economy. This proposal follows several earlier statements and documents under Action 1 of the Base Erosion and Profit Shifting initiative ("BEPS"), including a Programme of Work issued on May 28, 2019.

The proposal acknowledges that the digital economy has made it necessary to make significant changes in the traditional concept of permanent establishment based on physical presence. Further, changes are needed in the traditional methods of allocating business profits to permanent establishments based on a functional analysis of assets, activities of employees, business risks, etc.

The new proposed rules are aimed at promoting a unified approach among tax authorities and concern income taxation and not indirect taxes like value-added tax or tax imposed on goods and services. The OECD has elsewhere advocated a shift to basing indirect taxes on destination, not unlike the Wayfair decision handed down by the United States Supreme Court.

The fear of countries taking a unilateral approach to these critical issues of taxable presence (also called permanent establishment and nexus) is well-founded. France, Greece, the United Kingdom, India, Israel, Austria, Chile, the Czech Republic, Mexico, Indonesia, Italy, and others have legislation that has been either proposed or enacted to tax the digital economy. Candidates in both the Canadian and US elections have also raised taxing the digital economy as a campaign issue.

The approaches used to define permanent establishment and the tax base found in these unilateral digital taxes vary widely among these tax jurisdictions. That is precisely why the OECD is attempting to stem the tide of unilateralism with a uniform approach. Should it fail, a large portion of the current international tax system may be in jeopardy.

The OECD proposal relies on a blend of brand-new approaches and more traditional concepts. It applies to highly digital businesses like Amazon or Netflix, for instance, and customer or consumer-facing businesses. The precise contours of which market segments would be subject to the new approach were left a bit vague, likely by design, but resource-based and extractive industries would be outside the scope of these rules. This exclusion is likely because the traditional approach, based on situs, tends to work well for that sector. The blending of new and traditional methods occurs between designated Amounts A, B, and C, which we explain below.

Amount A, which introduces an approach outside traditional international tax principles, relies on the new concept of nexus or permanent establishment based on sales or economic presence. The proposal considers combining the sales of multinational groups or by business line. It proposes to look through third-party distributors, whether on a commissionaire or buy/sell basis, or marketing platforms in certain cases that remain to be determined. Segment reporting and country-by-country reporting may be helpful, but additional financial information may be necessary. The proposal considers a "revenue threshold" (perhaps the €750 million already in use in the context of country-by-country reporting) below which economic nexus would be deemed not to be present. Above the threshold, the new nexus rule would confer on the market or destination jurisdiction a new "taxing right." That right would exist without or alongside the traditional right to tax based on physical presence.

The proposal states that the approach would require multilateral agreement on a methodology for determining the scale or amount of profits reallocated to market jurisdictions. The proposal suggests that the new approach may require some form of deemed residual profit split that would remain after the allocation of routine profits (according to the traditional method of Amount B). This deemed residual profit might be allocated to market jurisdictions based on a sales formula and would deviate from the arm's-length principle used in traditional transfer pricing. There is hope that a common multilateral framework for determining taxability and the tax base will promote consistency and ease of compliance and administration.

For Amount B, the routine profits associated with distribution and marketing in market jurisdictions (in which a traditional permanent establishment based on physical presence already exists) would continue to be taxable. This taxation would be based on the allocation of business profits to that permanent establishment according to the arm's-length principle, functional analysis, and traditional transfer pricing methodologies. The routine profits of Amount B are subtracted from total profits to arrive at the deemed residual profit used in calculating Amount A.

Amount C is reserved for amounts reported or reportable in the market jurisdiction that are in controversy and have been referred to the competent authority. The proposal recommends binding dispute prevention and resolution. Commentators have interpreted this to be a recommendation in favour of binding arbitration.

As far as the next steps are concerned, the current proposal will lead to public written comments followed by public consultations in November 2019, revised proposals in January 2020, and a final report by the end of 2020. The proposal acknowledges that this timetable is ambitious. It emphasizes, however, that the stakes are high.

Unless the broad consensus needed for a multilateral approach to taxing the digital economy is achieved, the current trend toward inconsistent unilateral digital taxes is likely to continue and accelerate. This inconsistency makes compliance and administration difficult and increases the risk of multiple jurisdictions imposing a tax on the same income without granting foreign tax credit relief.

The OECD suggests a new approach to taxing the digital economy is urgently needed to preserve a reasonably fair and efficient international tax system. The current system evolved over decades during the first half of the twentieth century and now must cope with the profound changes that have accompanied the transition to the digital economy.

Stay tuned! Or perhaps the modern phrase for this is "stay digitally connected"! There will be lots more to come on this issue.

Moodys Gartner Tax Law is only about tax. It is not an add-on service, it is our singular focus. Our Canadian and US lawyers and Chartered Accountants work together to develop effective tax strategies that get results, for individuals and corporate clients with interests in Canada, the US or both. Our strengths lie in Canadian and US cross-border tax advisory services, estateplanning, and tax litigation/dispute resolution. We identify areas of risk and opportunity, and create plans that yield the right balance of protection, optimization and compliance for each of our clients' special circumstances.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions