The appointment of a new US Treasury secretary has buoyed hopes that the Organisation for Economic Co-operation and Development (OECD) might be able to successfully broker a global agreement to reform international corporate tax rules, as was evident at the 11th meeting of the OECD/G20 inclusive framework (IF), held on 27 and 28 January.
Many speakers at the virtual gathering of the IF, a group of more than 135 countries and jurisdictions seeking to address base erosion and profit shifting (BEPS), warned of dire consequences if a global tax agreement to address the digitalisation of the world economy is not reached soon. “If we do not deliver a solution by mid-2021, over 40 countries are considering, or will move ahead with, a digital services tax [DST],” said OECD Secretary-General Angel Gurría, who is stepping down from his position in June. A DST is a tax on certain revenues of large digital companies.
The G20 finance ministers have set a deadline of mid-2021 for reaching a broad agreement on updating the international corporate tax system to address the digitalisation of the economy. The finance ministers’ last deadline of December 2020 was not met.
The IF’s efforts to create a new method of determining who gets to tax the income of certain multinational enterprises, particularly tech giants, will affect many companies and countries. 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.
Path ahead uncertain
Janet Yellen’s appointment as US Treasury secretary has sparked hopes amongst IF delegates that a global deal on taxing the digital economy may be achievable soon. But while the new US Treasury secretary has expressed support for the BEPS negotiations, she has been cautious in describing the new US position, which in any case may not be fully formulated yet. She wrote in responses to the US Senate Finance Committee on 21 January that the Biden administration “will pursue a comprehensive multinational agreement to update global tax rules”.
Yellen’s predecessor, Steven Mnuchin, had raised objections to pillar one of the IF’s two-pillar proposal because of concerns that US-based tech giants would be unfairly targeted by the proposed corporate tax changes. It is unclear at this point how the substance of the US position will change with Yellen’s arrival.
One should expect difficult negotiations ahead, according to Jason Furman, who chaired former US President Barack Obama’s Council of Economic Advisers, speaking during a panel discussion at the IF meeting. While the Biden administration will be “more instinctively friendly” to the BEPS process, “almost all the companies that we’re talking about are US companies”, meaning particularly tech giants.
“To come to agreement, the United States is going to have to focus a little bit less on protecting its national champions, and other countries are going to have to focus a little bit less on just trying to steal revenue from someplace [else]. So I think both sides do need to give some,” Furman said. “One shouldn’t expect that just because President Biden has a different tone towards international cooperation, that that’s going to completely be a 180-degree change in the way the United States approaches international issues.”
The IF’s two-pillar proposal
Pillar one of the IF’s proposal to update international corporate taxation would revise certain rules for determining profit allocation and nexus to expand the taxing rights of market jurisdictions (eg, the place where the user is located). Pillar two would introduce a mechanism for worldwide minimum corporate taxation, with the objective of reducing profit shifting and tax competition among jurisdictions.
The IF held a public consultation on the two-pillar proposal blueprints in January 2021. One of the main takeaways from the roughly 3,500 pages of comments received from more than 200 commentators was that the proposed rules need to be simplified.
Besides simplification, certain crucial scope issues remain to be decided before a global tax agreement can be concluded, including how large a company must be to fall within the new rules and which business activities would be covered. The US position has been that the new rules should not ring-fence digital companies, while many other countries prefer a focus on digital companies. These scope decisions must be made by political leaders, and, so far, an accord has been elusive. Other remaining questions include clarifying dispute resolution procedures.
Pressure to reach an agreement
In the meantime, impatient with the lack of progress, some nations have unilaterally implemented DSTs, usually promising to rescind them if the OECD is able to produce a multinational agreement through the IF. The EU, too, has indicated it may act on its own if the OECD’s efforts at brokering agreement on updating international corporate taxation are unsuccessful.
A proliferation of DSTs, in turn, could heighten trade tensions just as the world economy is emerging from the COVID-19 pandemic, several speakers at the IF meeting said.
“Let’s have 2021 be the year that we do this historic work and actually complete it,” said Canada’s Minister of Finance and Deputy Prime Minister Chrystia Freeland.
Several finance ministers noted that, in various ways, COVID-19 adds to the urgency of reaching a global deal on taxing the digital economy. For one thing, the pandemic has increased the fiscal pressure on nations’ treasuries, which will need to find methods of raising additional revenue, they said.
— Dave Strausfeld, J.D., is an FM magazine senior editor. To comment on this article or suggest an idea for another article, contact him at David.Strausfeld@aicpa-cima.com.