Although politicians have been rightly preoccupied by the coronavirus pandemic, they are starting to refocus their attention on OECD-led work on a global tax overhaul, holding promise for substantive progress, the OECD’s tax chief said.
“Ministers had other fish to fry — we all understand that,” said Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration. But they are now ready to get back to the project at hand because “no one wants a trade war at a time when the economy has been so badly disrupted,” he added.
Saint-Amans spoke during a May 21 virtual conference jointly organized by the Urban-Brookings Tax Policy Center and the University of North Carolina Tax Center.
The OECD is leading work on a two-pillar proposal to address the tax challenges of the digital economy, which calls for a revision of profit allocation and nexus rules under pillar 1 and global minimum taxation under pillar 2.
Nearly 140 countries within the inclusive framework on base erosion and profit shifting are in talks with the aim of reaching agreement on the solution by the end of 2020. Governments hope the solution will allow them to tax multinationals that raise revenues with little to no physical presence in their jurisdictions. The solution is also meant to discourage the proliferation of unilateral taxes aimed at digital companies, which could spark trade wars between countries.
The pandemic has affected negotiations among the inclusive framework, which had to move its plenary meeting from July to October. That hasn’t stopped the inclusive framework and the OECD secretariat from working intensively using virtual means, according to Saint-Amans. “Now we have politicians back in the loop, I think we can make some progress on substance,” he said, pointing to recent comments from French Finance Minister Bruno Le Maire and other ministers.
The OECD has already made great technical progress on revenue sourcing, scope, nexus, base determination, and business line segmentation, Saint-Amans said, adding that those elements would be subject to public consultation at some point.
“We’ll see whether October is realistic, or [if] some more time will be needed,” he said. Saint-Amans had previously indicated that while countries are still aiming for the end of 2020 for agreement on the solution, some of its elements may shift to 2021.
Two key trends are emerging from the talks as the COVID-19 pandemic unfolds. First, many countries are starting to push back on the conventional wisdom that it’s not possible to ring-fence the digital economy because the entire economy is digitalized, according to Saint-Amans.
Governments are now saying that digital companies are ring-fencing themselves because they appear to be thriving even though the economy at large has come to a standstill, Saint-Amans said. As a result, governments are looking to tax digital companies during their economic recovery efforts. “What seems for sure [is] digital is still the focus . . . by many countries, and having something tangible on digital [in pillar 1] would be highly expected,” he said.
Second, governments are not likely to tolerate tax avoidance by corporations that receive coronavirus-related bailout money, Saint-Amans said.
Those two trends indicate that the digital tax project is more relevant than ever, Saint-Amans said, adding that the pandemic may also have an effect on international trade, as it seems to be “pulling some teeth out of the mouth of section 301” tariff threats from the United States linked to digital taxation.
Agreement on pillar 2 is “a no-brainer,” especially since the United States has introduced the global intangible low-taxed income provision of the Tax Cuts and Jobs Act, according to Saint-Amans. “Assuming that GILTI would be grandfathered, which we see as something quite obvious to happen, you [don’t necessarily have] many countries objecting to pillar 2,” he said, although some countries like China do have concerns. As a result, “there is a fair chance to see something very significant in October on pillar 2,” he added.
However, questions remain surrounding the United States, which has been sending contradictory messages on pillar 1. At first, the United States did not want the solution to ring-fence the digital economy, but also raised concerns about pillar 1’s focus on consumer-facing businesses, according to Saint-Amans. The United States has also proposed implementing pillar 1 on a safe harbor basis, which other countries have had trouble accepting. It remains to be seen how those contradictory messages will be resolved in the coming months, he said.
Saint-Amans did have a stark warning for U.S. businesses who are calling for a delay in the project’s timeline. “The current circumstances are not conducive to multilateralism,” he said. If the project is delayed, countries will introduce unilateral measures and companies “may be the victim of bad actions,” he added.
“What matters is we have good rules for a conducive tax environment for growth [and] for tax certainty, and that will be achieved only if there is the perception that the balance is properly struck,” Saint-Amans said.
Pillar 3 to Come?
When asked what he thought about a recent academic proposal to add pillar 3, a global excess profits tax, to the OECD’s project as a way to raise post-pandemic revenues, Saint-Amans said it is not on the table. However, he did float the idea of a third pillar internally at the OECD that would develop BEPS rules aimed at the least-developed countries that may not have benefited much from the original BEPS project.
“Small developing countries will need something to be still part of the international consensus and adhere wholeheartedly to the institutions we’ve built, and there, we may need a pillar 3,” Saint-Amans said.