Amidst uncertainty, the Organisation for Economic Co-operation and Development is continuing work on a proposed international agreement to address the tax challenges of the digitalised economy.
The stakes are high in the continuing efforts of the OECD/G20 “inclusive framework” (a group of more than 135 nations) to create a new method of divvying up the right to tax the income of certain multinational enterprises, particularly tech giants. Social media sites, search engines, digital streaming services, and other companies offering digital products often pay little tax in a country even though many customers or users are located there.
In the meantime, some nations have implemented their own unilateral digital services taxes (DSTs), usually promising to rescind the tax if the OECD, an organisation of 37 countries, is able to produce a multination agreement through the inclusive framework. The EU, similarly, has indicated it may act on its own if the OECD’s efforts at brokering agreement on taxing the digitalised economy are unsuccessful.
Blueprint due in October
The next major deadline for the OECD’s effort to forge a global deal on taxing digital-based companies is October, when the organisation will present a detailed blueprint of a two-pillar plan.
The G20 finance ministers requested the blueprint to be completed by October, when they are scheduled to meet, because they hope to finalise an agreement on taxing the digitalised economy by the end of 2020. The timeframe may have to be extended, however.
“As much as we welcome the G20 telling us that they hope to have an agreement by year end”, Pascal Saint-Amans, director of the OECD’s Centre for Tax Policy and Administration, said during an OECD Tax Talks webcast on 22 July, “we have to recognise that there are a number of pending issues”.
“We don’t exactly know what type of agreement will be reached in October,” Saint-Amans noted further. “We know that some of the key questions have not been solved, like the scope issue” — including the extent to which the new international taxation rules will apply to multinational entities besides tech giants. Another scope question is how large a company must be to fall within the scope of the new rules (a proposed revenue threshold of €750 million ($881 million) has been discussed).
As noted, the OECD/G20 inclusive framework is developing a two-pillar proposal on base erosion and profit shifting, or BEPS. Much of the focus so far has been on digital-based companies.
Pillar one would modify the location where multinational enterprises’ income is taxed by creating a three-part approach to determining profit allocation and right-to-tax (nexus). Expressing reservations about this portion of the proposal, US Treasury Secretary Steven Mnuchin has proposed that pillar one instead be implemented on a safe-harbour basis, which appears to mean the new regime would be optional. In a 12 June letter to finance ministers, Mnuchin further called for a pause to the pillar one discussions because of the COVID-19 pandemic.
The US is more receptive to pillar two, which would introduce a mechanism for worldwide minimum corporate taxation. The purpose of the minimum tax would be to prevent erosion of countries’ tax bases by reducing the incentive for multinationals to shift profits to low- or no-tax jurisdictions. The minimum-tax regime would be largely based on the US global intangible low-taxed income (GILTI) provisions and the base-erosion and anti-abuse tax (BEAT).
Perhaps doubting that global agreement will be reached soon on taxing tech giants, some nations have adopted or proposed unilateral DSTs, including Italy, Spain, France, and the UK. The Office of the US Trade Representative has initiated investigations into whether these DSTs discriminate against US-based tech giants. The US has threatened retaliatory tariffs against nations that enact DSTs.
The pandemic’s impact
The pandemic has complicated the OECD’s task of trying to forge an international agreement on taxing the digitalised economy, because nations have needed to focus their attention urgently on immediate public health and economic concerns.
Yet, the pandemic also makes the taxation issue more pressing. Without a multilateral solution on taxing tech giants, more countries are likely to unilaterally adopt DSTs to raise much-needed revenue in the wake of the COVID-19 crisis. “This, in turn, would trigger tax disputes and, inevitably, heightened trade tensions,” OECD Secretary-General Angel Gurría warned in an 18 June statement, responding to the controversy surrounding the US position on pillar one, which presents a major obstacle to the two-pillar plan. “A trade war, especially at this point in time, where the world economy is going through a historical downturn, would hurt the economy, jobs, and confidence even further,” Gurría said.
— Dave Strausfeld, J.D., (David.Strausfeld@aicpa-cima.com) is an FM magazine senior editor