No global tax agreement this year, OECD says

More than 130 jurisdictions working to address the tax challenges of the digitalised economy are now aiming for consensus by mid-2021, the Organisation for Economic Co-operation and Development announced 12 October.

The OECD/G20 inclusive framework on base erosion and profit shifting (inclusive framework, or IF) released blueprints of its two-pillar proposal to revamp international corporate taxation and reported that significant progress has been made on technical aspects of a global tax deal but that certain key political decisions remain. The G20 finance ministers, who had requested the blueprints, will discuss them at their meeting on 14 October.

The IF has invited public input on its pillar 1 and pillar 2 blueprints. Comments are due by 14 December, and public consultation meetings will be held in January 2021.

Pillar one of the IF’s proposal to address the tax challenges of the digitalised economy would adopt a new set of rules for determining profit allocation and right-to-tax (nexus), which generally would be more favourable to market jurisdictions (ie, the countries where activity actually takes place). Pillar two would introduce a mechanism for worldwide minimum corporate taxation, which is designed to reduce profit shifting and tax competition among jurisdictions.

Glass half full

While no global tax deal has yet been reached, Pascal Saint-Amans, the director of the OECD Centre for Tax Policy and Administration, gave his opinion in a 12 October webcast that the situation should be viewed as a glass half full. He emphasised that the IF has made substantial progress towards building consensus and there is a solid foundation for a future agreement.

All the conditions are in place to reform the taxation of multinational enterprises, at least technically. A new global tax system is definitely coming, and “the only question is when and how. Will it take a few months of hard negotiations, or will it take a few years after some chaos?”, Saint-Amans said during the OECD Tax Talks webcast on 12 October.

Digital services taxes

Saint-Amans said that “in the time of COVID, the last thing we need, the last thing we want, is a trade war”. He was referring to the fact that some nations, including France and the UK, have adopted digital services taxes (DSTs) targeted at big tech companies. The US has threatened retaliatory tariffs, arguing that the DSTs discriminate against US-based tech giants.

The EU, too, has indicated that it may act. “[L]et there be no doubt,” European Commission President Ursula von der Leyen said last month, “should an [IF] agreement fall short of a fair tax system that provides long-term sustainable revenues, Europe will come forward with a proposal early next year.”

Issues remaining to be decided

Saint-Amans said political decisions are necessary to move the global tax reform process forward. On pillar one, the existing areas of contention include:

• Issues around which business activities would be covered;
• The formula for allocating a portion of residual (ie, “above normal”) profits to market jurisdictions for companies that are considered to be above an agreed profitability threshold;
• The choice between implementation on a mandatory basis or as a safe harbour, as proposed by US Treasury Secretary Steven Mnuchin; and
• Aspects of the new tax certainty procedures aimed at dispute prevention and improved dispute resolution procedures.

On pillar two, technical implementation issues remain, as well as questions about whether the co-existence of the US GILTI (global intangible low-taxed income) regime would be treated as being compliant under pillar two, among other issues.

Package of documents released

The IF, whose report will be presented at a virtual meeting of the G20 finance ministers on 14 October, released the following documents:

• Report on Pillar One Blueprint;
• Report on Pillar Two Blueprint; and
• Economic Impact Assessment.

In addition, there is a cover statement, a highlights summary, and a set of answers to frequently asked questions.

— Dave Strausfeld, J.D., (David.Strausfeld@aicpa-cima.com) is an FM magazine senior editor.