Digital Peru: The challenges of the digital economy and Pillar One

The OECD has issued new tax regulations for Pillar One and the Pillar One – Amount B. They aim to adapt to the ever-evolving digital economy and to avoid undesirable base erosion and profit shifting (BEPS).

What is the situation for businesses?

Digitalisation has transformed the economy, driving new business models and digital markets. This has altered the value creation process and fostered remote activities, posing fiscal challenges for multinational companies that can operate in foreign markets without taxation. Therefore, international tax rules are being reviewed to address the distortion between territoriality and extraterritoriality, emphasising the need for a coordinated international solution to maintain global economic stability.

A brief overview of Pillar One

The OECD’s Pillar One aims to redistribute taxing rights among countries, particularly for Multinational Enterprises (MNEs) in the globalised economy. This involves allocating a portion of MNEs’ residual profits to jurisdictions where the income is generated, using global revenue thresholds and profit margins to determine its application.

• Amount A prioritises profit allocation to revenue-generating jurisdictions
• Amount B simplifies the application of the arm’s length principle in marketing and distribution activities

There are various opinions on this approach, with some suggesting a gradual implementation starting with the largest and most profitable MNEs, say the Ecovis lawyers and accountants.

We support companies in developing tailor-made strategies and optimising tax structures.

Octavio Salazar, Partner, ECOVIS Peru, Lima, Peru

Uncertainties about Pillar One and topics to be evaluated

Implementing the OECD’s Pillar One involves adapting international tax norms at the national level, requiring collaborative efforts and possible adoption of multilateral conventions. Although progress has been made in the technical architecture of Amount A, differences and standstills in implementation persist, especially in developing countries like Peru, where limited capacity and experience may hinder the process. Uncertainty persists on issues such as GDP thresholds and the definition of Amount B, posing additional challenges for effective and equitable implementation of Pillar One, especially in developing countries.

Final reflections

The OECD’s Pillar One aims to address the challenges of the digital economy through changes in international tax norms, particularly through Amount A and the rules regarding nexus and income sourcing. However, its implementation faces obstacles such as complexity and high administrative costs, especially in countries like Peru. It is crucial to question whether the proposed modifications will indeed enhance revenue collection and streamline business operations, and whether Pillar One will be a long-term solution or just a temporary measure.

In the face of changes in international tax regulations, it is essential for companies to stay informed about updates and understand how these changes can affect their operations and tax obligations.

For further information please contact:

Octavio Salazar, Partner, ECOVIS Peru, Lima, Peru
Email: octavio.salazar@ecovis.com.pe