While the United States supports the OECD’s ongoing work on a solution to update international tax rules for the digital age, it remains wary about any potential departures from the arm’s-length standard and nexus rules.
In a letter to OECD Secretary-General Angel Gurría dated December 3 and disseminated December 4, U.S. Treasury Secretary Steven Mnuchin expressed support for discussions taking place within the OECD framework. The OECD is aiming for consensus on a multilateral approach to address the tax challenges related to the digitalization of the economy through a two-pillar work program. Pillar 1 focuses on revised profit allocation and nexus rules, while pillar 2 focuses on global minimum taxation.
To ensure that that approach is effectively implemented, broad support is required to pass amendments to domestic legislation and tax treaties, Mnuchin wrote. After consulting with U.S. taxpayers, Treasury found “broad support for greater tax certainty and administrability,” according to the letter.
But the United States has “serious concerns regarding potential mandatory departures from arm’s-length transfer pricing and taxable nexus standards — long-standing pillars of the international tax system upon which U.S taxpayers rely,” Mnuchin wrote.
The latest iteration of the pillar 1 “unified approach,” which the OECD published October 9, sketched out a three-tiered profit allocation method, under which in-scope consumer-facing multinationals would be taxed on three groupwide profit categories — amounts A, B, and C — in market jurisdictions.
Amount A in particular would represent a new taxing right for market jurisdictions, based on a new nexus possibly linked to sales and allocation of an affected company’s non-routine profits, also known as residual profits. The concept would signal a departure from the arm’s-length standard.
If the pillar 1 proposal were to be a “safe-harbor regime,” then that would not only assuage those taxpayer concerns but also allow the pillar 1 work to reach its goals, Mnuchin wrote, without giving much detail about what such a regime might entail. The United States, however, fully supports a pillar 2 solution that is similar to the global intangible low-taxed income provision of the Tax Cuts and Jobs Act, Mnuchin added.
Despite U.S. concerns, Mnuchin underscored the importance of a multilateral agreement to prevent unilateral measures such as revenue-based digital services taxes from proliferating and repeated the United States’ opposition to such taxes.
“We urge all countries to suspend digital services tax initiatives in order to allow the OECD to successfully reach a multilateral agreement,” Mnuchin wrote.
The letter comes just days after the Office of the U.S. Trade Representative proposed hefty tariffs on French goods, including handbags, cheese, and sparkling wines, after its section 301 investigation concluded that France’s 3 percent DST discriminated against U.S. companies and contravened international tax principles. Those threats, however, did not seem to cow Austria, which is pressing ahead with a digital advertising tax, or U.K Prime Minister Boris Johnson, who confirmed that the United Kingdom would move forward on its DST if he is reelected December 12.
Let’s Talk
Gurría responded to Mnuchin in a December 4 letter, thanking him for his support for the discussions through the OECD framework and for a multilateral solution, adding that the TCJA set the tone for advancing the work. He also noted Mnuchin’s involvement at G-20 meetings “that moved the discussions to a broader scope using a more formulaic approach and a new nexus concept that moved us beyond the tax rules as they currently stand,” according to the letter.
The unified approach has “a very strong tax certainty dimension,” without which consensus could not be reached, Gurría wrote, pointing out that the OECD has already held two public consultations to get input on how to design the solution.
“Throughout the extensive consultation process, however, we had so far not come across the notion that Pillar 1 could be a safe-harbor regime,” Gurría wrote. The OECD raised that concern because it could affect the ability of the 135 countries in the inclusive framework on base erosion and profit shifting to advance the work within the tight deadlines that have already been set, he added.
The inclusive framework, which is responsible for finding agreement on the solution, will hold a meeting in January 2020 during which it is expected to work out details. Political agreement is expected in June 2020.
Gurría also invited Mnuchin to Paris to discuss the matter further with French Finance Minister Bruno Le Maire before December 25. The Treasury press office did not respond by press time to Tax Notes’ request for comment on whether Mnuchin would accept the invitation. France recently endorsed the unified pillar 1 approach.
Mnuchin’s letter is a strong affirmation of the United States’ ongoing engagement in the OECD discussions, which is “really good news,” Will Morris, deputy global tax policy leader at PwC and tax committee chair for Business at OECD, told Tax Notes. But it also clearly sets out the U.S. position and moves the negotiations into a different phase, he said.
Both letters underscore the tight timeline for a solution, according to Morris. But the negotiations are about fundamental, complex changes to the international tax system involving a significant number of countries, he said. “And that is going to require time,” he added.