Finland Chamber of Commerce thanks for the opportunity to provide comments on the OECD Discussion Drafts Tax Challenges Arising from Digitalisation – Reports on Pillar One and Two Blueprints. Finland Chamber of Commerce supports the view that instead of several unilateral digital taxes, the tax challenges of the digital economy should be solved multilaterally at the OECD level.
As a background, companies located in Finland pay corporate income tax at a rate of 20% on the worldwide income. International double taxation is eliminated by using credit method. The tax base is wide apart from few tax exemptions that are mostly based on EU Directives and aim to elimination of economic double taxation. From this perspective, and considering the small population, proposed Pillar 1 could shift tax base from Finland to big market countries and decrease the corporate income tax revenue in Finland. In addition, the risk cannot be excluded that the proposed tax reform could increase the administrative burden of the Finnish companies and tax administration, which also affects the taxable income and results to need for additional tax revenues.
Shifting tax revenues derived from successful business to market countries but bearing losses and start-up costs in a small economy would affect the business climate. The reduced revenues from the profitable companies may have to be recouped from other businesses, if social objectives are to be met. The decrease in corporate income tax revenue could also increase tax burden on labour, which would be against OECD’s recommendation to reduce effective tax rates on labour income (OECD Economic Surveys: Finland 2020) and hamper the growth of the Finnish economy.
In order to mitigate the risk that small developed economies with high taxation lose their tax revenue in the reallocation of taxing rights, Finland Chamber of Commerce proposes the following:
- In defining the multinational enterprises that are in scope of Amount A, the threshold of a gross revenue test should be set at €10 billion.
- The scope of Amount A should be limited to business income that is currently not taxed in the source/market state. Income that falls into the definition of royalty in line with OECD Model Tax Convention, e.g. licencing fees, should be left outside the scope of amount A.
- The recently implemented BEPS measures, particularly within the EU, should be considered in assessing the impacts of Pillar 1 and 2.
Furthermore, we kindly ask to consider the following aspects in further preparation:
- Finnish multinational enterprises are of the opinion that the ”Amount B” procedure under Pillar 1 is unlikely to lead to a significant reduction in transfer pricing disputes or to a material improvement in legal certainty, but instead could generate new disputes. The scope of Amount B should be defined as unequivocally as possible. The fixed remuneration range should be wide enough to provide flexibility in all cases and different markets. Amount B should not lead to situations where low-profit activities are heavily taxed or to situations where the Amount B does not correspond to the actual business model. Particularly in low-margin business a high remuneration level could lead to changes in business operation model.
- The revenue sourcing rules seem to be complex and require collection, transfer and restoring of user data. The risk that the rules are not compliant with the European GDPR rules or other local data protection rules cannot be excluded. In addition, disposal of valuable user data between group companies may trigger additional transfer pricing questions and/or withholding tax. Collection or purchase of user data from third parties only for taxation purposes may also lead to additional costs for multinational enterprises.
- Segmentation rules would differ from the current IFRS segmentation and thus increase the administrative burden of the companies. Consequently, segmentation should be voluntary in all cases and it should not lead to situations where Amount A becomes payable where the MNE does not generate residual profits.
- Identifying paying entities under the proposed 4-step process may lead to an unpredictable outcome where an entity bears the Amount A tax liability without any connection to market jurisdictions or valuable (marketing) intangibles, particularly if the profitability test is based solely on payroll and tangible assets. Group entities that may derive residual profits from valuable marketing intangibles should be included in paying entities, even if performing also baseline marketing and distribution activities.
- Setting up an effective early certainty process is of utmost importance for taxpayers. However, the risk cannot be excluded that tax administrations will be flooded with companies seeking early certainty and due to resource constraints will have difficulty in delivering timely certainty to meet the demands. Furthermore, the proposed review panel and determination panel processes could be very burdensome for small countries considering the relatively small amount of tax revenues per case. Therefore, we stress the importance of the simplicity of the tax rules in order to enhance tax certainty.