Although work on a global tax revamp is still on schedule, it remains to be seen whether countries will move toward multilateralism or unilateralism after the coronavirus pandemic, the OECD’s tax chief said.
Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration, reiterated April 24 that despite the crisis, the timeline hasn’t changed for delivering a solution to address the tax challenges of the digital economy by the end of 2020.
The original announcement on March 17 had elicited some angry letters from U.S. businesses, who said the OECD should instead focus on emergency responses to the coronavirus pandemic, which the OECD did, Saint-Amans said. He was speaking during a virtual seminar, “Business Life After the Virus: Who Pays and How?” organized by Jericho Chambers, a U.K. activist consultancy.
The G-20, which mandated the OECD to carry out the work on such a solution, hasn’t yet directed the organization to change the timeline, Saint-Amans said. Instead, the G-20 underscored the work as a priority in its latest finance ministers and central bank governors' communiqué, he added.
The OECD is leading work on the design of a two-pillar solution to modernize corporate tax rules and is aiming for consensus among nearly 140 members in its inclusive framework on base erosion and profit shifting. Pillar 1 calls for a unified approach to revising international profit allocation and nexus rules, and pillar 2 consists of a global anti-base-erosion proposal providing global minimum taxation.
Certainly, international negotiations are now more difficult, not only because the global tax overhaul project has winners and losers, but also because it’s “extremely difficult to negotiate without meeting people physically,” Saint-Amans said. “Good technology will not replace human interaction.”
Saint-Amans outlined some key outcomes of the 2008 financial crisis, including increased multilateral cooperation on tax issues, because of the “tax paradox,” in which countries engage in multilateralism in order to preserve their individual tax sovereignty.
However, it’s unclear whether the world will go in the same direction following the coronavirus crisis, according to Saint-Amans. “Multilateralism is much more at risk. . . . I can tell you that the landscape has changed,” he said. “The dynamic is quite different from [what] it was back in 2008-2009.”
The question is whether there will be tax cooperation or war, according to Saint-Amans, pointing to the rise of unilateral measures to tax the digital economy. U.S. threats to impose retaliatory trade sanctions on countries that introduce digital services taxes, which the United States sees as discriminatory against U.S. companies, may not be as effective as they were before the pandemic, according to Saint-Amans. That’s why many countries that were hesitant to move unilaterally — like Indonesia and Nigeria — are now doing so, he added.
But at the OECD, there is still a push for cooperation, Saint-Amans said. “We are still working on pillar 1 and pillar 2 of the digital project. . . . Here we need to see whether we are moving toward more coordination or toward more unilateralism, and the tax paradox I mentioned which worked in 2008 may work again,” Saint-Amans said.
There may be pushback on multilateralism as countries introduce more unilateral measures like DSTs, but they will soon realize they won’t work, Saint-Amans said. “You can try to exercise your sovereignty on your own, but you will fail to do so because . . . the economy is [still] global,” he said. “Therefore, you need the cooperation of others.”
Saint-Amans also noted that countries may move more toward capital taxation, including corporate income tax, to raise revenues after the pandemic. Some companies may be experiencing big losses, but there are also some profitable ones, such as tech firms, he said.
“We may have said in the past you cannot ring-fence the digital economy, but I would say throughout the crisis, it is ring-fencing itself quite obviously,” he added. However, Saint-Amans warned that countries should not rely on fiscal consolidation too quickly following the pandemic.
Chris Morgan, head of global tax policy at KPMG UK, agreed that the issue of multilateralism in a post-pandemic world is a difficult one, as countries are going to have different economic responses. “There is a real risk this is going to put pressure on multilateralism,” he said.
When it comes to the debate about taxing the digital economy, “it would not be good for the economy to go down a unilateral route and have lots of new taxes,” Morgan added. “It’s much better to go forward and try and get the agreement and do things on a multilateral basis.”
The concern about multilateralism is that the OECD’s work on BEPS would “impose a fairly complex new system that will bring in pretty limited revenue, especially for poorer countries,” said Robert Palmer, executive director of Tax Justice UK.
The OECD should focus more on how they can best support lower-income countries, perhaps by doing technical work on such options as wealth taxes or excess profits taxes, Palmer added.
There’s still so much that is unknown about how the coronavirus crisis will unfold, but it has certainly aggravated the massive economic challenges that existed before the pandemic started, according to Femke Groothuis, founder and president of The Ex-Tax Project.
“This may not be the time for immediate systemic reforms, but we should consider what, in the next crisis, we will wish we had done now,” Groothuis said, adding that there is a need to rethink the tax system so that businesses are less exposed to global risks and can use resources more efficiently. “We need a considered, step-by-step approach into a better future.”