ITR live: OECD consultation on pillar one
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ITR live: OECD consultation on pillar one

OECD releases long-awaited model rules for pillar two on GloBE system

The OECD holds its public consultation on its pillar one blueprint to reform international tax, ITR reports live.

The first day of the OECD's consultation may be over, but there is still a lot to discuss. The OECD will be hosting a day of consultation on its pillar two blueprint on January 15.

The next step for the Paris-based organisation is the G20/Inclusive Framework meeting onJanuary 27-29. Yet there is just six months left to reach a final agreement.


Finishing at 16.30:

The Inclusive Framework (IF) still has to find enough common ground to support a final draft. "Many countries have an idea of what they would like to do with pillar one," says Martin Kreienbaum, chair of the Inclusive Framework.

"The difficulty is finding a consensus," he adds.


Final comment from Tim McDonald, P&G:

"I don't profess to be a digital expert, so these are more distant impressions. I think you would strive for multinationals to generally be in one of these two mechanisms: Either a taxable presence or the absence (which for short-hand we just called 'scale without mass')," he explains.

"If you're looking at definitions, you could probably build off of a broad interpretation of ADS," McDonald adds. "It would certainly have sales thresholds like the current blueprint, both at the country and global enterprise level."

He alluded to the reason why DSTs first emerged, specifically the ability of large multinationals to reach into markets and generate profits without being taxed.

"There needs to be the absence of a local counter-party, a local distributor or service provider, if you're providing a service, because one of the fundamental, original objections - and why DSTs came about - was there is a large and uncapped ability to exploit a market without being a taxpayer," argues McDonald.


Christopher Jentile, Verizon, echoed McDonald's point on segmentation.

"Taxpayers really should be allowed the flexibility to segment their results based on their books or records," says Jentile.

He stresses the risk of not allowing segmentation: Tax positions could be distorted.

"Unilateral DSTs need to be eliminated as a condition for the implementation of pillars one and two," he adds.


"We are by definition optimistic," says Achim Pross. "There could be a fast-track scope type ruling process."

Taxpayers need certainty about whether or not they are in scope, says Pross.


Alison Lobb, partner at Deloitte: "After 10 months of working at home, I can finally un-mute myself at the right moment."

Key points on tax certainty and administration:

"It will be essential on Amount A to get to agreement and to certainty at the end of the process," says Lobb.

- Clear timetables will help move everybody towards certainty;

- Determination panels should be used as little as possible;

- Separate the scoping process;

Deloitte broadly supports the OECD's proposals. However, there is much work to be done. The lessons of CbCR show the problems of developing and instituting a new system.


In a January interview with ITR, the OECD's tax director Pascal Saint-Amans was optimistic about the prospect of a final agreement in 2021.

“Work on the taxation of the digital economy has been extremely tedious given the political and technical circumstances with COVID-19,” Saint-Amans told ITR while discussing his experiences of 2020.

“In spite of these circumstances, we have been able to deliver blueprints on pillar one and pillar two. We failed to deliver a consensus but it’s not the end of the story because we have a solid basis for an international agreement in 2021,” adds Saint-Amans.

He was also clear about the BEPS project and the need to "go further".

“Have we killed the use of tax havens? No. Have we killed tax avoidance? No. Have we reduced it drastically? I think yes. However, we need to go further and finish the work”, the OECD tax director says.


Final comments:

"Simplicity is going to be the key to moving things forward," says Chadwick.

"Our business is typical of many," says McDonald. "No matter how much we advertise, we think that reminds people of our products."

"It has almost no connection to excess returns," he adds. "So I challenge the basis on which Amount A has been built."

'Cheeky' comment: "Grappling with Amount A and looking at the effective allocation, isn't that the work of governments?" asked Verlinden.


The implications of Amount B:

Isabel Verlinden, PwC: "I would like to go back to basics on Amount B. Basics as in OECD transfer pricing guidelines."

Amount B is crucial for making Amount A successful, argues Verlinden. "This is the reason that we thought simplicity is extremely important in the context of certainty," she says.

Verlinden makes the case for qualitative indicators, as well as quantitative indicators.


The OECD hopes to engage more with the US as once as Joe Biden is sworn in and the new administration takes shape. However, European governments appreciate the need to give the new president time.

Nevertheless, the German Finance Minister Olaf Scholz has made it clear his government wants to cut a deal with Biden as soon as possible.


Oxfam presents its criticisms of the OECD blueprint and argues that the new rules do not go far enough and would not cover enough countries.

This is the first time we've heard from an NGO, trade union or civil society organisation since the TUAC this morning.


Chadwick restates the argument for mandatory binding arbitration. This is a concern for most multinational companies. He suggests the new rules could work quite well if this was put in place.

Any future changes should be put through the Inclusive Framework to prevent further unilateralism, suggests Chadwick.


Francois Chadwick, Uber, expects Amount A to produce new risks and disputes.

"The stakes are going to be raised even higher," says Chadwick.

Uber recommends the OECD think Amount A scope

"Given the significantly different objectives of Amount A and B, we don't believe there is any direct intersection," says Chadwick.

Uber does not believe that there will be an "intersection" between Amount A and B without a lot more work.

The blueprint recognises TP adjustments can hit the countries where the company is operating. The draft commits to address these issues. Some kind of ICAP programme may be suitable to address this.

Chadwick stresses that Amount A has to be resolved first.


The Indian government has tried to chart its own course on digital tax. Not only has India introduced an equalisation levy long before the DST trend, the Modi government is now considering a new version of this levy.

India has backed a much more formulaic approach based on significant economic presence. Meanwhile the country has moved towards its own version of fractional apportionment.


The panel turns to dispute resolution.

Suchint Majmudar, NASSCOM: "One of the outcomes [in India] is that the APA programme has been progressing well."

The MAP experience has also been good, but limited to eliminating double taxation. "Businesses require a constructive approach," says Majmudar.

"The objective is to attain certainty for businesses on where they pay taxes and how much."

India's APA programme a possible substitute for a dispute resolution mechanism


McDonald points to "definition disagreements and ambiguities" as the source of political problems. Many companies have called for their industry or business model to be exempt from the new rules, he stresses.

"Our proposal is to reimagine Amount A and B. What we suggest is let's make the definition very clear. You're either a taxable presence, what we call a traditional business, or you don't have presence," says McDonald.

P&G added new features to Amount A as part of its proposal. This is partly based on the company's engagement with developing countries. Many developing countries lack the resources to manage the proposed new rules.

"If we're trying to enhance tax certainty, all those who are participating should be participants in the certainty," McDonald says.


P&G was just one of several companies calling for the OECD to recognise the GILTI rules as "an equivalent IIR regime".


Tim McDonald, P&G, has taken a leading role in the digital tax debate.

McDonald calls for strong policy guidance to stabilise policy. He stresses the importance of segmentation to make Amount A workable.

He argues that Amount A produces risk of a political challenge. "If that's the basis, this project will fail," McDonald says.


The second panel discussion starts, featuring such companies as Procter & Gamble (P&G), Verizon and Uber. The focus is on tax certainty.


Thomas Roesser, Microsoft reiterated the company's views on the pillar one blueprint:

“While there is no agreement on scope, profitability threshold, and reallocation percentage, the blueprint and economic impact assessment repeatedly use examples that produce a result we do not believe is modest,” said Thomas Roesser, senior director and tax policy counsel at Microsoft.

“Any additional profit allocation to market jurisdictions beyond the arm’s-length principle under Amount A should be less than 2% of remote sales into a jurisdiction,” he added.


Microsoft's senior tax advisor Bill Sample serves as chair of the USCIB tax committee. In past ITR interviews, Sample has been clear that he thinks the plans could cost business more than the BEPS project:

The OECD's tax plans more costly than BEPS

Here are a couple more articles featuring our conversations with Sample:

US companies prepared to accept global minimum tax rate

J&J's proposal won't solve digital taxation, says Bill Sample


Netflix's Lisa Wadlin continues to have technical difficulties.

Pascal Saint-Amans: "This is ironical.."

Wadlin returns to conclude: Netflix supports the introduction of a new taxing right. However, Amount A should not be defined by the ADS and CFB concepts. Digital streaming should be categorised as a CFB.


Netflix rejects 'political' ring-fencing in OECD digital tax blueprints

Lisa Wadlin, Netflix, stresses the need to ground the proposal in "objective principles".

"We would highly recommend the reduction of technicalty complexities," she adds.

Once again, Wadlin warns against 'political' ring-fencing. She recommends the OECD avoid ring-fencing and opts for a phased-in approach. She also criticises the 'ADS' concept and argues a streaming business would not fall within its definition.

Wadlin points out that Netflix does not "monetise user data".


Netflix's video feed breaks up.

"I think Netflix has gone down..." says Matt Andrew, senior tax advisor at the OECD.


The panelists are far from alone in their concerns. Pillar one is a lot more controversial than pillar two among many taxpayers. This is why the OECD may be able to settle pillar two much sooner than pillar one.


Although the OECD consultation has been very comprehensive, there are notable absences from the process: Facebook and Google have not issued public comments in the way that Amazon and Uber have.

Instead both companies are represented by advocacy groups like the Alliance for Competitive Taxation (ACT) and the Silicon Valley Tax Directors Group (SVTDG). Nevertheless, Facebook and Google are at the heart of the debate.

Facebook's decision to shift IP to US reflects industry tax concerns

US companies move on from double Irish


Double taxation is a key concern for all taxpayers.

Colin Garwood, Intercontinental Hotels Group: "Double taxation in both jurisdiction needs to be addressed."

Garwood is concerned that chapter 7 of the pillar one report does not provide enough detail on ways to prevent double taxation.


Amazon is not alone in its sourcing demands.

Simon Graddon, Amazon: "It's about having a solution that's certain and simple."


Amazon had a very busy tax year in 2020. Here's just some of our coverage:

Amazon to pass on UK DST cost to sellers (eBay did too)

Amazon fights to overturn EU state aid ruling

The company has been involved in the digital tax debate for a long time. Amazon was calling for simplification in 2019.


Keidanren plays a key role in Japanese tax policymaking. Here's some of our past coverage:

Japanese companies fear the rise of the profit split method


Unilever's proposals to simplify pillar one and two are just one set of recommendations. Johnson & Johnson's work has played a key role in the past.

The OECD will have to make a choice about which ideas to take on board and which ideas to discard.


Janine Juggins, executive vice president of global tax and treasury at Unilever: "Complexity really is the common enemy."

ITR just published an article on Unilever's recommendations to simplify pillar two.

Unilever takes a decentralised approach to tax given it has a presence in more than 100 countries worldwide.


Simplicity and certainty are crucial for developing economies, says Weingrod, but moving towards simplicity is not always easy.

Matt Andrew, senior tax advisor: "Does your proposal include enhanced dispute resolution?"

Weingrod: "We don't address that full-on, but we certainly assume it would be a part of the programme."

"The main attraction would be the certainty."


Louise Weingrod, J&J, says the proposal is "unlikely to be sustainable" due to the level of complexity. "We see the arm's-length principle as the only appropriate method for [most] pricing," she says, but adds that "We support a fully formulary approach," in some key areas.

One possibility: Position the formulary method as a safe harbour with the ALP remaining as an option outside of it.

Weingrod points out the advantages of safe harbours for raising the level of compliance by making the process easier for businesses.

Weingrod argues pillar one should be "repositioned". She makes the case for a new category 'Amount Z'.


Tax simplification is at the core of the first panel discussion. Companies represented on the panel include Amazon, Johnson & Johnson (J&J), Panasonic and Unilever.


Tax base issues:

- Almost unanimous support for the proposed earn-out approach for carry-forward losses;

- Widespread support for accounting for pre-regime losses and profit shortfalls;

- Strong support for unlimited loss carry-forward, but with some kind of time limit (10 years, 20 years, 5 years, even 3 years);

Double counting:

- Widespread support fort he marketing and distribution profits safe harbour;

- Some support for the domestic business exemption in concept, but questions about whether it could feasibly be developed;

- Calls for the ALP to be used as part of this;

- Businesses and advisors opposed to application of Amount A on top of withholding taxes.


Common ground:

- Support for market revenue threshold for a nexus rule;

- Concerns that nexus 'plus factors' will create an excess compliance costs.


There is a big divergence on the scope of pillar one:

- Some stakeholders want a wider scope, whereas others want a much more narrow scope;

- A number of stakeholders pointed out problems with ADS as a category, particularly around revenue-sourcing and administration;

- A minority of stakeholders favour a US safe harbour approach;

- Some stakeholders want to reduce complexity by starting small and building out, starting at a higher level with gross revenue;

- A number of stakeholders want more clarity on the objective of the proposal.

Achim Pross acknowledges a variety of alternative proposals from business and civil society.

There is broad support for a de minimis foreign in-scope revenue exception, but with different views on the parameters for this.

There is also strong support for the global revenue threshold of EUR 750 million and a lot of support for a phased-in approach starting with the largest multinational enterprises (MNEs).


Achim Pross, head of the International Cooperation and Tax Administration Division at the Centre for Tax Policy and Administration, gives a "super quick recap" of the consultation.

"We cancelled Christmas to read them. We didn't have much to do anyway," says Pross. 

"We do see a not insignificant degree of convergence on the building blocks," he says. "It's useful to see that there is no one voice of business and no one voice of government, but a diversity of views."

The blueprint may appear to be "more complicated" than it actually is, Pross claims.


Habbard supports the move away from the arm's-length principle (ALP). He criticises business for "gaming" tax administrations.

Habbard says the more fundamental issue beyond simplification is the need for unitary taxation.


Habbard calls for the two pillars to be "decoupled". A robust agreement on pillar two is crucial regardless of the disagreements and problems with pillar one, argues Habbard.

"It's important to ensure some fair balance in the income inclusion rule between source and residence countries," says Habbard.

"We would also expect that you lower the threshold," he says.


Pierre Habbard, general secretary of TUAC, criticises the lack of OECD engagement with trade unions. He claims it risks "policy coherence" due to the "high technicality" of proposals.

Habbard stresses the need to consider the environment and employment, as well as the impact of the COVID-19 crisis.

"Unemployment is skyrocketing all over the place," says Habbard. "There are big winners out of the crisis."

"The context is the worst possible crisis and a looming crisis of confidence in business at large," he adds.

He singles out technology companies as "the big winners" who are "under-taxed". He calls for the OECD to engage more with trade unions and civil society organisations.

"The conversation should not be limited to tax lawyers and businesses," he says.


"It's difficult to come up with a single business point of view," says Will Morris.

Amount A has not been "completely articulated". He suggests there is a possibility of narrowing down Amount A. The problems are very real, he stresses. "Looking at the current Amount A it's a little hard to discern that," says Morris.


Will Morris, chair of BIAC's tax committee: "There is a huge amount of support in the business community for a multilateral agreement."

Whatever the flaws of pillar one and pillar two, Morris stresses that the problems of unilateral measures are far worse. He thinks that the business community wants to help carry the proposals over the finishing line.

"The amount of work that has gone into this is almost literally Herculean," says Morris.


The lack of a consensus is a key contributor to complexity in the solution, according to Saint-Amans. "We are working actively to find how we can simplify the pillars," says Saint-Amans.


Tax simplification is at the top of the agenda.

Martin Kreienbaum, chair of the Inclusive Framework: "We also hear the concerns about complexity loud and clear. Simplification has already played a big role in our discussions at the Inclusive Framework."

The Inclusive Framework will seek engagement with the Biden administration as soon as it can.

Pascal Saint-Amans, director of the OECD's Centre for Tax Policy Administration: "We have six months to move ahead... One of the key partners, key countries, is the United States of America, where there is a process of transition."

"We are in a sense in waiting mode for the signals from the US."

Starting at 12.30 (CET)


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