Tech companies have for years bedeviled tax collectors around the world through the use of complex tax structures that allow them to pay little, if any, money to their host countries, often by routing profits through foreign subsidiaries. The Organisation for Economic Co-operation and Development (OECD), an intergovernmental organization, is now soliciting input on three possible plans for an international tax regime covering the complex world of tech profits. 

The first plan is the "user participation" proposal that is premised on the idea that soliciting the sustained engagement and active participation of users is a critical component of value creation, with the activities and participating of these users contributing to brand creation, data generation and market power. For example, Facebook would use be useless if it had no users from which to draw personal data that could then be sold to marketers. 

Under this proposal, profit would be allocated to jurisdictions in which a business's active and participatory user bases are located, regardless of whether they have a local physical presence. This seems similar to the economic nexus rules that many U.S. states are adopting to recapture sales tax revenues, particularly in the wake of the recent Wayfair decision. Businesses would calculate their residual or non-routine profits, attribute a portion of them to the value created by user activity, allocating those profits between jurisdictions in which they have users based on an agreed upon allocation metric like revenues, then giving those jurisdictions the right to tax that profit regardless of physical presence. 

The second plan is the "marketing intangibles" proposal, which is meant to apply not just to tech companies but to any firm with international activities, because it would focus on a concept called marketing intangibles, defined as an intangible relating to marketing activities that aid in the commercial exploitation of a product of service and/or has an important promotional value for the product concerned. This could include trademarks, trade names, customer lists, customer relationships or proprietary market data. This proposal notes that many companies can use these marketing intangibles to "essentially 'reach into' a jurisdiction" either remotely or through a limited local presence. An example of this would be the now-defunct "Double Irish" technique that involved a company shuffling around profits through subsidiaries that were made just to hold intellectual property rights that the company would then license to other parts of the company around the world. 

Under this proposal, profit from marketing intangibles and their risks would be allocated to the market jurisdiction in which they are held, which would then be entitled to tax some or all of the nonroutine income properly associated with them, while all other income would be allocated among members of the group based on existing transfer pricing principles. This would have the effect of giving jurisdictions the right to tax businesses that don't have a taxable presence there, given the importance of marketing intangibles for many digital business models. The allocation would apply regardless of which entity in a multinational group owns the legal title to the marketing intangibles, which entities in the group perform or control the functions relating to those intangibles, how risks related to them would be allocated under existing transfer pricing rules and how those rules would ordinarily allocate income related to them. 

The third plan is the "significant economic presence" proposal, which assumes that technological advances have rendered existing nexus and profit allocation rules ineffective. It's premised on the observation that a company now can be heavily involved in the economic life of a jurisdiction even if there is no significant physical presence. 

Under the proposal, taxable presence in a jurisdiction is created when a nonresident enterprise has a significant economic presence, in that jurisdiction. The basic factor for determining this would be sustained revenues coming from that jurisdiction, though this alone would not be sufficient to establish nexus. Other factors that would be considered in addition to revenues would be the existence of a user base and associated data inputs, the volume of digital content derived from the jurisdiction, the billing and collection in local currency or other local payments, the maintenance of a website in a local language, the responsibility for the final delivery of goods to customers or other services, or sustained marketing and sales promotion activities to attract customers, whether online or otherwise. 

In general, OECD proposals like this one involve the creation of agreed-upon rules of the game for international cooperation. They can culminate in formal agreements by countries, for example on combating bribery, on arrangements for export credits, or on the treatment of capital movements. They may produce standards and models, for example in the application of bilateral treaties on taxation, or recommendations, for example on cross-border co-operation in enforcing laws against spam. They may also result in guidelines, for example on corporate governance or environmental practices.

Interested parties are invited to send their comments on this consultation document. Comments should be sent by March 1, 2019, at the latest by email to TFDE@oecd.org in Word format (in order to facilitate their distribution to government officials). Comments should be addressed to the Tax Policy and Statistics Division, Centre for Tax Policy and Administration.