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BEPS | OECD proposes new nexus and profit allocation rules

On 9 October 2019 the OECD secretariat published a public discussion paper on the tax challenges of the digital economy. The “unified approach” is intended to ensure taxing rights for market economies, even if enterprises do not have a physical presence in that country. The approach suggests to supplement the arm’s length principle by a formula-based solution. Multinational companies must be prepared to these impending changes in international corporate tax law.

The OECD aims to issue recommendations based on consensus for the taxation of the digital economy until 2020 and has been putting a lot of effort into this matter. In May 2019 the OECD published the „Programme of Work to Develop a Consensus Solution to the Tax Challenges Arising from the Digitalisation of the Economy“. In this paper the OECD suggested to focus on two pillars. Pillar one deals with a new nexus and new profit allocation rules regarding digitalized business models. Pillar two suggests introducing an effective minimum taxation (“BEPS 2.0”) in order to fight tax loopholes that remain after the implementation of anti-BEPS measures proposed 2015. The unified approach now aims to find a solution for pillar one. The discussion paper on the unified approach has been introduced via a webcast, that can still be viewed on YouTube

The unified approach suggests complementing the arm’s length principle with a formula-based solution for market jurisdictions, while leaving existing transfer pricing rules in place. This would mean the proposal would be a second layer on top of the existing transfer pricing regime. However, the unified approach would result in a partial abandonment of the concept of permanent establishments. Market jurisdictions would receive additional taxing rights, also in cases where there is no physical presence


The unified approach covers Multinational Enterprises (“MNEs”) with highly digital business models, but goes wider, broadly focusing on consumer-facing businesses. Further work must still be carried out on scope and carve-outs. Extractive industries are currently assumed to be out of the scope. A threshold based on group-revenue is also being considered. 

Current international taxing rules do not allow to tax MNEs in countries where there is no physical presence. Many business models nowadays however do not require a physical presence (eg streaming of music or films, online marketplace for hotels/apartments). In principle, the unified approach would ensure that MNEs, conducting significant business in places where they do not have a physical presence, can be taxed in such jurisdictions. In order to achieve this the unified approach proposes a new nexus (taxing right) and profit allocation rules for this nexus. 

New Nexus 

The new nexus could be based on sales an MNE makes in a certain country (through a related or third-party distributor). Physical presence will not be relevant for this criterion. In case a certain threshold in a country is exceeded, this country would be entitled to tax profits of the MNE under the new nexus rule. The threshold could be country specific, to ensure that jurisdictions with smaller economies can also benefit. It would be designed as a new self-standing treaty provision within the OECD model convention.  

Profit allocation rules

With respect to profit allocation, the discussion paper recognizes that existing profit attribution rules work well for most routine transactions. As such the proposal recommends that current transfer pricing rules are retained but are complemented with formula-based solutions to allow for the taxation of business activities in more complex scenarios. The OECD therefore proposes the introduction of the following three-tier mechanism for allocating profit.

  • Amount A – Based on the new nexus a share of deemed residual profits is allocated to the market jurisdictions using a formulaic approach. Put simply, the residual profit is the profit that remains after the profits of the whole group or business line from routine transactions have been allocated to the respective jurisdictions.
  • Amount B – The second type of profit would seek to establish a fixed return for certain “baseline” or routine marketing and distribution activities taking place in a market jurisdiction. Given the large number of tax disputes related to distribution functions, a fixed remuneration would benefit taxpayers and tax administrations by reducing the risk of double taxation and consequently the number of international tax disputes.
  • Amount C – Taxpayers and tax administrations should retain the ability to argue that the marketing and distribution activities taking place in the market jurisdiction go beyond the baseline level of functionality and therefore warrant a profit in excess of the fixed return contemplated under Amount B. There will also be cases where an MNE group or company perform other business activities in the market jurisdiction unrelated to marketing and distribution. In either case an additional profit – Amount C – would be due where this is supported by the application of the arm’s length principle. Therefore, binding and effective dispute prevention and resolution mechanisms would be required.

Following this mechanism, the unified approach aims to grant greater taxing rights to market jurisdictions over residual profits based on a formulaic system, while leaving the arm’s length principle in place for routine transactions. On page 14 of the OECD discussion paper you will find an illustration on how the unified approach could work in an MNE.

Next steps 

The OECD invited comments from the public, in order to discuss the results during a public consultation on 20 & 21 November 2019. Comments are to be sent in MS Word format until 12pm (CET) on Tuesday, 12 November 2019, using the email address TFDE@­ We will be preparing a statement together with our colleagues of WTS Global.

The OECD targets to reach an agreement on the unified approach by January 2020. This ambitious timeline is set to avoid the risk that countries will take unilateral steps to tax digital companies. 


The discussion paper of the OECD is still very vague and contains hardly any detailed suggestions. Among other things it is largely unclear which companies will ultimately be affected. The term “consumer-facing business” is not defined and open to a wide understanding. At the WU Transfer Pricing Symposium 2019 one of the panellists even was of the opinion that ultimately every company is consumer-facing. Anyway, companies acting globally must be prepared for the impending re-distribution of profits and monitor the debate closely. 

For the time being, however, the unified approach must be transposed into national and treaty law first. It can be expected that within the European Union this will be done through a mandatory directive. In light of the questionable success of the implementation of the MLI, a worldwide implementation of the unified approach seems uncertain. 

What can ICON do for you?

As competence centre for international tax law we are closely monitoring the latest BEPS developments. If you would like to know the effects of the BEPS-Project on you or your company, please do not hesitate to get in touch with us.