Nearly 140 countries that were planning to meet in July to try reaching political consensus on a proposed global corporate tax overhaul will now meet in early October because of the coronavirus crisis.
Pascal Saint-Amans, director of the OECD’s Centre for Tax Policy and Administration, confirmed the postponement during a May 4 Tax Talks webcast, and floated the possibility of the solution taking on a staged approach.
The countries, which belong to the OECD inclusive framework on base erosion and profit shifting, were scheduled to meet July 1-2 in Berlin, aiming for agreement on a two-pillar solution to address the tax challenges of the digital economy.
The July meeting will likely be replaced by a virtual meeting during which members will discuss the progress that has been made and adopt a report about the implementation of the BEPS project measures, according to Saint-Amans.
While the date for the October meeting and whether it would take place in person had not yet been decided, Saint-Amans said it would take place before the G-20 finance ministers and central bank governors meet on October 15-16.
The inclusive framework is expected to adopt a BEPS package comprising the solution during that meeting, Saint-Amans said. However, it’s not yet clear whether the inclusive framework will deliver a full package of measures in October, he added.
“The reasonable expectation here is we may have a staged process,” Saint-Amans said, speculating that some aspects of the solution, mainly on pillar 1, would have to shift to 2021, although many countries have said both pillars are linked.
The inclusive framework, which includes OECD and non-OECD countries, is looking for an internationally agreed, coordinated solution that will allow countries to tax multinational companies that raise revenues in their jurisdictions with little to no physical presence under current tax rules. It is also working on the outstanding issues that the original BEPS project did not address.
Pillar 1 calls for a three-tiered approach regarding profit allocation and nexus rules that would give greater taxing rights to market jurisdictions, while pillar 2, a global anti-base-erosion proposal, would introduce minimum corporate taxation. The OECD is leading the project, at the behest of the G-20, which is expected to approve the solution by the end of 2020 pending agreement among the inclusive framework.
Observers have ramped up speculation about the project’s ambitious timeline in recent weeks, with some questioning whether the project would — and should — remain on track, given the extraordinary circumstances of the coronavirus pandemic.
On March 17 the Centre for Tax Policy and Administration said the project was still on schedule despite the growing crisis and the work would be carried out using digital channels. The G-20 finance ministers and central bank governors on April 15 confirmed that the group would continue pushing forward on the project, saying the work was more relevant than ever because countries will have to consider ways to raise revenues as they recover from the pandemic.
However, some business groups — and one or two countries — have called for delaying the project’s timeline by a year, according to Saint-Amans.
“What we see today is a strengthened call for a solution,” Saint-Amans said, adding that over the past two months, there has been increased appetite among inclusive framework members for a consensus-based approach.
There has been substantial progress on pillar 1, although there are still questions about its scope and the type of companies it will cover, Saint-Amans noted. According to the inclusive framework’s updated workplan for the solution, which it approved during its January 29-30 meeting, in-scope businesses include automated digital services, such as search engines and social media platforms, and consumer-facing businesses that sell goods and services to customers for personal use.
There is an emerging view on pillar 1, particularly on amount A, that it should be targeted at digital companies, according to Saint-Amans, who noted that those companies seem to be “ring-fencing themselves.”
Amount A would represent a new taxing right for markets, based on a new nexus linked to sales and allocation of an affected company’s non-routine profits, also known as residual profits. However, many countries, including the United States and China, are firm that any solution can’t ring-fence the digital economy — a key conclusion of the BEPS report on action 1.
The United States in particular has said it would impose punitive tariffs on countries that introduce unilateral digital taxes, since the U.S. view is that those types of taxes discriminate against American companies. “What can be done in this area?” Saint-Amans said. “We will see, we are assessing it, and the [inclusive framework] members are currently discussing this.”
Achim Pross, head of the international cooperation and tax administration division at the Centre for Tax Policy and Administration, also noted good progress on pillar 2, such as rule coordination between the pillar’s four elements: the income inclusion rule, undertaxed payments rule, switchover rule, and subject-to-tax rule. He said the OECD is “looking to engage with the stakeholder community” sometime in the summer.
Work also continues on impact assessments of both pillars, according to Saint-Amans, who noted that during the last meeting of the inclusive framework’s steering group, delegates discussed a “modelization of a trade war” in response to unilateral measures.
That discussion resulted in the conclusion that a multilateral solution would still be much better than a no-solution scenario resulting in more unilateral measures, Saint-Amans added.
Moreover, the team working on the impact assessments will try to incorporate the effects of the coronavirus crisis, Saint-Amans confirmed. He also expressed hope that inclusive framework members will agree to publicize their individual impact assessment results and that the OECD will be able to present that data by the end of summer.
Full Steam Ahead
The Information Technology Industry Council remains confident that the project will continue to focus on ensuring agreement on a solution despite the rescheduled meeting, said Jason Oxman, the group’s president and CEO.
The date change acknowledges the reality of the pandemic, according to Brian Jenn of McDermott Will & Emery. “There is no substitute for in-person interactions when trying to hash out sensitive political issues,” he said.
The project’s overall timetable hasn’t changed, said Will Morris, deputy global tax policy leader at PwC and tax committee chair for Business at OECD. “And increased focus on digital — also reflected in an uptick of new DST-like rules from some major G-20 jurisdictions — needs to be reconciled with the [United States'] long-standing objections to ring-fencing the digital economy,” Morris said. “Those difficulties may lead to a greater focus on pillar 2 as we get toward the end of the year, and a shift in focus toward pillar 2 is likely to change both its shape, as well as the shape of pillar 1.”
Jenn expressed doubt that the United States would accept a permanent solution targeting digital companies, but countries aren’t likely to wait to impose new taxes on those companies, either.
“In this environment, and with the threat of tariffs seeming less plausible in the middle of a severe global economic downturn, the prospect of the [United States] brokering some ostensibly temporary compromise while work on a broader package continues seems less implausible than it once did,” Jenn said.
Keeping countries at the table may require a phased-in approach or the introduction of limited measures that would be revisited at a later stage, according to John L. Harrington of Dentons. “At this point and under these circumstances, I think the parties are less concerned about orchestrating the process than losing control of the process,” he said.