Stewart Brant sets out the OECD’s response to 2020 challenges
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Stewart Brant sets out the OECD’s response to 2020 challenges

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Head of the transfer pricing (TP) unit at the OECD, Stewart Brant, talks to Deloitte about how the OECD is responding to the challenges of taxing the digital economy, COVID-19 and developing dispute prevention and resolution mechanisms.

Stewart Brant has been leading the TP unit at the OECD Centre for Tax Policy and Administration since August 2019. Deloitte's Bob Stack, Robert Plunkett, Samuel Gordon and Ralf Heussner touch base with Stewart on the OECD's ongoing work on the taxation of the digital economy and its relevance to the financial services (FS) sector, the OECD/Inclusive Framework (IF) on TP guidance related to addressing the impact of COVID-19, and other key areas.

Deloitte: Stewart, could you please provide an update on the work on the taxation of the digital economy at the level of the OECD/IF, and the anticipated timing?

Stewart: Over the past several months, OECD/IF members have been focused on the COVID-19 pandemic, albeit work continued on the project. Members have not been able to meet physically to discuss the work on the taxation of the digital economy, but virtual meetings were organised on a regular basis. Due to some delays that were caused by the pandemic, the IF meeting, scheduled to take place in early July in Berlin, has been deferred until October. During the past weeks, the US took the position that – to oversimplify – it would not be able to agree on a solution regarding pillar one before the US elections. This created a lot of fuss in the press.

With more distance now, we see that the IF members, including the US, remain engaged, and that technical discussions on the 11 building blocks for pillar one, including nexus, scope, business line segmentation, tax base and tax certainty, are well-advanced. At a minimum, we expect that we can provide an update on the progress of work on pillar one in the fall and to have advanced the work as much as possible by October.

I am focused on pillar one. I know the work on pillar two is more advanced, but there are some uncertainties on whether a political agreement can be reached in October without an agreement on pillar one.

As you can imagine, the situation is fluid and more details may emerge after the G20 finance ministers meet in July. In the meantime, the work continues at full speed.

Deloitte: Where do you see the main tension points to reach consensus for pillar one?

Stewart: The main tension points to reaching a consensus solution to the tax challenges arising from the digitalisation of the economy have been well-documented. On pillar one, three technical issues have been particularly contentious.

In the BEPS Action 1 report in 2015, it was concluded that it was difficult, if not impossible, to ring-fence the digital economy. This is specifically the position taken by the US, notably in US Treasury Secretary Steven Mnuchin's letter of June 12. This is why, in January, the IF agreed that the scope of a unified approach to pillar one (and Amount A specifically) should not only cover automated digital services but also be extended to cover consumer-facing businesses. However, members still have different views on whether Amount A (which allocates taxing rights to the market jurisdictions) should vary based on the degree of digitalisation.

Secondly, members have divergent views on the role that binding dispute prevention and resolution mechanisms should have, and whether these mechanisms should be extended to cover TP disputes more broadly.

Finally, members have divergent views on whether regional factors should be taken into account in the computation and allocation of Amount A.

I am, however, pleased to report that we are making progress on these and other issues. We continue to work with members to find compromises that will form the foundation of a consensus solution.

Deloitte: Can we still expect to see the contemplated carve-out for the FS sector, and did the OECD/IF already discuss potential scoping issues for the FS sector carve-out?

Stewart: The concept of a "financial services carve-out" has always been slightly misplaced. As OECD/IF members agreed in January, most of the FS sector would not fall within the proposed consumer-facing business or automated digital services scope for Amount A. Providing clarity on this point, through a specific exclusion, will help provide businesses with greater certainty.

There is then a separate question on whether it is appropriate to exclude from the scope the parts of the FS sector that are consumer-facing, such as retail banking, or that may fall within the definition of automated digital services, like peer-to-peer lending platforms.

Discussions on this issue are ongoing. However, there is broad recognition from members that the regulatory requirements faced by the banking, insurance, and asset management industries imply that profits in these industries are already overwhelmingly taxed in the market jurisdiction where they are generated. This supports the argument for a broader exclusion from the scope of Amount A for the FS sector.

Deloitte: To what extent do you share the concern of the FS sector that the application/interpretation of the new taxation rules (either under the OECD/IF framework or unilateral digital services tax (DST) regimes) may be broadened over time?

Stewart: Let us start with the facts. DST regimes are not targeted at the FS sector. Some, such as the UK DST, even include specific exemptions for certain types of financial services. And beyond that, many countries already have a variety of FS-specific taxes, such as bank levies or insurance premium taxes. So I am not convinced that the FS sector should be too concerned at this stage.

However, things change. Technology is disrupting all industries and the FS sector is no exception. If in the future the regulatory requirements faced by the FS sector changed, such that it could no longer be assumed profits are taxed in the market jurisdictions in which they are generated, then the proposed exemption from Amount A may need to be revisited.

Deloitte: To what extent do you anticipate a new focus on the delineation of risks and treatment of losses, given the economic/financial impact of COVID-19? Could you please also outline the agenda of the OECD/IF on addressing the tax impact of the COVID-19 situation?

Stewart: COVID-19 is having a profound impact across every country and every business. It is impossible to ignore the devastating effect that lockdown has had on industries, such as travel, and oil and gas. The members of the OECD/IF understand that this unique crisis has significant tax consequences. It seems inevitable that, given the current environment, an area of focus will be the delineation of risks and the treatment of losses. Though, other questions will also arise. For example, in relation to the tax implications of government assistance programmes.

In addition to the specific tax policy work related to the COVID-19 crisis, notably a report for the G20 finance ministers' meeting in April 2020 (a database collecting all the COVID-19 related tax measures worldwide and work by the Forum on Tax Administration, the FTA), at the beginning of lockdown in Europe in April, the OECD Secretariat published an analysis of the impact of the COVID-19 crisis on tax treaties. This analysis was well received in the business community, to whom it provided much-needed certainty.

The Secretariat is now exploring with OECD/IF members whether it would be helpful to provide simple supplementary guidance of key TP issues. OECD/IF members have expressed differing views on this issue. All members have emphasised that most of the principles we need to deal with in the crisis are already contained in the OECD Transfer Pricing Guidelines (TPG). For example, Chapter I of the TPG emphasises the importance of economic circumstances in the accurate delineation of risks.

However, we also understand that, in other areas, additional guidance may be helpful. Members are exploring whether it would be possible to develop additional guidance on specific issues, where current guidance is limited and COVID-19 has a particular material impact. As a first step in this work, Working Party No. 6 (which is responsible for TP) and the FTA's mutual agreement procedure (MAP) Forum have submitted a joint questionnaire to Business at the OECD (BIAC). The objective of this questionnaire is to collect information from businesses on the TP issues that they are facing in real-time. The results of this questionnaire will inform our next steps.

Deloitte: Could you please provide an update on the OECD/IF agenda for dispute prevention and resolution?

Stewart: Dispute prevention and resolution is a core component of our work on pillar one and a key part of the OECD/IF's tax certainty agenda, which the G20 mandated us to work on. As has been widely reported, members have different views on the role of mandatory binding arbitration in resolving disputes. Some members are strongly supportive, but others are strongly opposed.

The Secretariat has been working with members to develop innovative dispute prevention and resolution mechanisms that can bridge this gap. Work is progressing on a simplified administration system, akin to a one-stop-shop, that would allow a taxpayer to centralise responsibility for the calculation and allocation of Amount A. This system could combine a series of tax certainty panels that would be responsible for resolving disputes between taxpayers and tax administrations. Most members recognise that the multilateral nature of Amount A necessitates this kind of centralised system.

On TP disputes more broadly, Amount B, which would establish fixed returns for baseline marketing and distribution activities, is designed to prevent disputes arising in the first place. We are also exploring what new dispute prevention and resolution tools can be developed for other areas of disputes, such as for returns for distribution activities that exceed the defined baseline. Again, we are looking for innovative solutions that will enable us to reach a consensus.

Deloitte: What is the timeline for sharing analysis of the information gathered by country-by-country reporting (CbCR)? Has an analysis of the data indicated that there are significant amounts of zero-taxed income around the world? Did the amount of corporate tax paid appear to rise in the years since CbC was enacted, compared with corporate taxes paid in the years before CbC filings?

Stewart: The first year of aggregated and anonymised CbCR data was released in July 2020 as part of the second edition of the corporate tax statistics database. The release of the CbCR data provides significant new information on multinational enterprises (MNEs) and their activities relative to existing data sources; however, like all data sources, the CbCR data is subject to a number of limitations. The insights that can be drawn from this data have been highlighted, as well as the limitations of this new and important data source.

It is important to note that the CbCR data that was released was for 2016. Changes in corporate taxes paid and potential trends in BEPS behaviour cannot be detected in a single year of data.

Deloitte: What can we expect in the future with respect to potential updates of the 2010 OECD guidance on the attribution of profits to permanent establishments (PEs), especially in the light of the digitalisation of the FS sector, impact on key entrepreneurial risk-taking (KERT) functions, etc.?

Stewart: The project that culminated in the publication of the guidance on attribution of profits to PEs in 2010 was one of the OECD's longest-running tax projects, spanning a period of 13 years. With our current work on the tax challenges of digitalisation, it is difficult to foresee this guidance being revisited in the near future.

In the foreseeable future, no further work or amendments to the existing guidance is being considered. Nonetheless, we recognise the pace of technological development in the FS sector, as in other sectors, and continue to monitor its impact for the purposes of both Article 9 and Article 7, which would, of course, include KERT functions.

Deloitte: What is the thinking of the OECD on the trade-offs between fairness versus economic growth, especially in the current economic environment? Is the OECD updating the economic impact of pillar one and pillar two and their impact on global growth?

Stewart: This is an issue of critical importance to all members of the IF. The OECD Secretariat recently produced a policy paper: 'Tax and Fiscal Policy in Response to the Coronavirus Crisis: Strengthening Confidence and Resilience', which was delivered to the G20 finance ministers. This paper discusses the current economic environment and some of the trade-offs that will need to be considered as countries move through the different phases of the global pandemic.

We expect that tax fairness will be an important issue in the aftermath of the crisis, and we expect that there will be even less tolerance for tax avoidance. Against this backdrop, there is a strong likelihood that the crisis will provide further momentum to the international tax reform discussions being negotiated at the OECD, as countries begin to focus on the long-term responses that may be needed to address mounting revenue pressures. While these long-term questions are of great importance, the current focus needs to be on the policy settings required to support the economic recovery.

While the impact of the COVID-19 pandemic will not show up in any widely available data for some years, the OECD Secretariat has been considering the interaction between the crisis and any future proposals for international tax reform, and will seek to address these issues as part of the impact assessment.

In assessing the potential impact of pillars one and two on global growth, our preliminary findings suggest that reforms would only lead to a modest increase in marginal tax rates for a selected group of companies, particularly companies that are highly profitable and those engaging in profit-shifting. Against these costs, the potential costs of failing to reach international consensus appear to be growing, with the ongoing threat of unilateral action and resulting trade retaliation posing a continuing threat to global growth and investment.

Deloitte: Where do you see the goals and objectives of the OECD's TP policies aligned with those of the EU and UN? Where do they differ? Do you expect the differences to narrow or widen in the next five years?

Stewart: Historically, there have been divergences of views between the OECD and the UN on TP matters. This was particularly visible when both institutions were representing different interests, with the outdated representation of the developed/developing countries' divide. Thankfully, and despite what some would want to suggest, the gap is now being narrowed.

As you know, the IF on BEPS includes 137 members, 70% of which are non-OECD, non-G20 members. As a result, the steering group of the IF and our working parties include the participation of developing countries, thereby including their perspectives in the work. This translates to further collaboration with the UN, as the OECD is being consulted in its projects (e.g. guidance on financial transactions), but more generally with regional organisations, such as the African Tax Administration Forum (ATAF), Inter-American Center of Tax Administrations (CIAT), etc. Overall, there is a willingness to ensure that the guidance produced by the OECD and the UN are quite aligned and in conformity.

Regarding the EU, there is a strong collaboration between the OECD and the EU on all tax matters, including TP policies. With respect to TP, the OECD has regularly taken part in discussions at the European Commission's joint TP forum until the end of its mandate, contributing to ensuring the outcomes of the forum are consistent with the OECD TPG. In addition, the OECD meets frequently with the Directorate-General for Competition to discuss state aid cases that raise interesting issues on their alignment to the OECD Guidelines.

Deloitte's insight

The breadth of topics covered in the interview with Stewart Brant reflects the scope of the OECD/IF's involvement in virtually all areas of international tax, and its ability to react in real-time to rapidly changing events, such as COVID-19.

The OECD/IF remains a fine example of multilateral cooperation on these important issues, even if some of the more high-profile issues face challenging political obstacles from time to time. With respect to the work on the digitalisation of the economy, while there may be a pause in reaching a political agreement, the technical work continues, with the hope of reaching a deal that would include an agreement by countries to retreat from unilateral measures, including digital services taxes.

Regarding the work on pillar one, the OECD/IF is taking into complete account the unique features of the FS industry, particularly its high degree of regulation, with a recognition that as business models change agreed rules may need to be adapted further.

The OECD's important role in presenting and analysing data is highlighted in the discussion of the presentation of CbC data. Finally, a variety of COVID-19 related issues continue to be analysed by the OECD/IF, from treaty issues to the potential impact on TP rules, in a period when so many companies are experiencing losses from the unforeseen pandemic.

Stewart Brant's detailed and informative responses remind us that, now more than ever, it is important to be tuned in to the ongoing work at the OECD/IF, as well as the work of the G20 finance ministers, who often turn to the OECD/IF for important technical and policy-related help.

Click here to read the entire 2020 Deloitte/ITR Financial Services Guide

Robert Stack


Managing Director

Deloitte US

T: +1 202 220 2100

Robert (Bob) Stack is a managing director in Deloitte's Washington international tax practice, where he advises US companies on a full range of tax issues and collaborates with Deloitte's global member firms on international tax developments and initiatives, including those from the OECD.

Until January 2017, Bob was the deputy assistant secretary for international tax affairs in the Office of Tax Policy at the US Department of the Treasury, where he worked towards developing and implementing all aspects of US international tax policy, including treaties, regulations and legislative proposals. In addition, Bob was the official representative of the Obama administration for international tax policy and represented the US government at the OECD, where he was involved in all aspects of the BEPS initiative.

Prior to joining Treasury, Bob had over 26 years of experience in international tax matters, representing both corporations and individuals.

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