Treasury should postpone the OECD’s work on updating global corporate tax rules for the digital age as companies and governments continue grappling with the economic fallout of the coronavirus crisis, a major trade group said.
In a March 23 letter to U.S. Treasury Secretary Steven Mnuchin, the U.S. Council for International Business (USCIB) said that although international consensus on a common solution to address the tax challenges arising from the digital economy “remains a critical goal,” both governments and taxpayers must divert all their resources to respond to the growing pandemic.
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 by the end of 2020. Most recently, the OECD’s Centre for Tax Policy and Administration (CTPA) said that, despite the coronavirus emergency, the work continues as scheduled through virtual channels, and it expects to meet a key July deadline for reaching a political decision on the solution.
However, the USCIB recommended delaying the OECD’s work by at least six months. “It is not prudent to drive 135-plus countries toward international consensus during a global pandemic when governments must prioritize responding to the crisis, companies are under extreme strain, and travel is not possible,” the letter says.
The OECD and the G-20, which mandated the work, should reevalulate once better data emerge about the pandemic’s health and economic effects and then decide whether additional postponements are necessary. “Implementation of unilateral actions should also be suspended,” the letter says.
Linda Evans, director of IBM’s global tax policy and government affairs, said her company, also a USCIB member, supported postponing the OECD’s work.
“Now is not the time to accelerate increasing taxes on companies under a new regime when companies are facing these challenging times,” Evans told Tax Notes. “And during a time of pandemic spread, virtual and digital communications and networks that involve enterprise cloud computing are essential and will remain essential [and] should not be burdened with additional taxation.”
Treasury did not respond to Tax Notes’ request for comment by press time.
The OECD remains concerned about the COVID-19 crisis and has prioritized working on tax policy advice for its members to respond to the crisis, Pascal Saint-Amans, director of the CTPA, told Tax Notes. The CTPA recently outlined emergency tax policy and administration measures that governments can adopt to immediately respond to the crisis, and is now “working on what exit strategies could be,” he said.
“As regards the work on digital, we are still working on the mandate as it was given to us by the G-20,” Saint-Amans said. The CTPA has taken note of the USCIB’s letter and understands that companies are concerned with their struggles in dealing with the crisis, he added.
“We also note that a number of businesses — tech and nontech — seem to have different views on this issue,” Saint-Amans said. “This is why we are working at the technical [level] with our members.”
'A Rock and a Hard Place'
World governments are rightly preoccupied with a deadly pandemic, which should take priority over tax policy debates about the digital economy, according to Robert J. Kovacev of Norton Rose Fulbright US LLP. “Extending the deadline would permit more constructive discussions once the current crisis passes,” he said.
However, stimulus and recovery programs are expensive, Kovacev added. “The temptation to levy unilateral digital taxes will only increase as the costs of the pandemic rise,” he said. “Maintaining a truce may prove too much to ask from jurisdictions even hungrier for new sources of revenue than before. Even though postponing the deadline would be wise, the increased demand for more tax revenues may force the OECD’s hand.”
The OECD’s project “is between a rock and a hard place,” said Brian Jenn of McDermott Will & Emery. “The pandemic is certainly straining resources of governments and businesses that could be devoted to this process, but on the other hand, I expect that after a brief — maybe very brief — pause, the countries seeking to impose [digital services taxes] will be even more anxious to go forward with those in light of having even greater revenue needs than before."
Several countries, including France and the United Kingdom, have become impatient with the pace of OECD negotiations and have pushed ahead with their own digital services taxes. The United States is opposed to such measures, which it sees as discriminatory against U.S. companies.
“The OECD process offers the only prospect of reining in unilateral measures to any degree, either in the short run or the long run,” Jenn added.
Other Recommendations
The USCIB in its letter also recommended that Treasury implement several measures to maintain business liquidity and employment in the short term.
The letter says Treasury should adopt policies that would “treat employees as continuing to work in the location where they worked prior to COVID-19 for purposes of assessing corporate income tax liability; determining the existence of permanent establishments, nexus, or substance; determining employee individual tax liability; determining employer payroll tax liability; or determining sales tax/VAT on cross-border services.”
The pandemic has suddenly and dramatically changed where employees work because of such factors as travel restrictions, border closures, and guidance to stay home to prevent further virus spread, the letter says, adding that in many cases, employees live across a border from their offices.
The tax treaty implications of employee confinement caused by the coronavirus crisis is a valid one, according to Saint-Amans. The OECD is working on that issue, he added. “We hope to come up urgently with some guidance on tax treaty implementation, the goal being to make it easy for all taxpayers and tax administrations,” he said.