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The OECD’s digital tax plans more costly than BEPS
The USCIB Tax Committee Chair and Microsoft's Tax Policy Advisor Bill Sample spoke to Josh White about why the OECD’s digital tax plans will be more costly than the BEPS Action Plan.

The OECD released its long-awaited report on digital tax just in time for the US Council for International
Business (USCIB) to analyse the document at its conference in Washington DC,
where business leaders and tax officials came together to discuss the topic.
The document lays out the OECD’s pillar one proposals to
reform digital tax, such as marketing intangibles, user participation and
significant economic presence. Pillar two attempts to complete the work of the
BEPS project with three possible routes: fractional apportionment,
destination-based taxation or a global minimum corporate rate.
“The big difference between pillar one and the BEPS project is
that pillar one is a process that will involve re-allocating income and tax
bases from active trade or businesses in higher tax countries, whereas with BEPS it
was starting to tax non-taxed income located 'nowhere',” Sample said.
“Many countries were not hurt so much when BEPS re-allocated non-taxed
income from nowhere, but in the case of pillar one, countries will lose income
and their tax base,” he stressed. “Pillar one is a highly political process,
even more so than BEPS was. It requires a political solution.”
Sample chairs the USCIB tax committee, but he also serves as vice chair of the Business at the OECD (BIAC) tax committee. He represented Microsoft on all worldwide tax policy and regulatory matters for more than a decade as corporate tax director, before taking on the role of tax policy advisor in 2017.
Sample told TP Week
that whatever route governments agree to on taxing the digital economy, it is
important that the income allocation is modest and the mechanism for allocating that
income is simple. “But it also needs to be based on agreed principles to be
sustainable,” Sample added.
Back to first principles
What those agreed principles will look like is still uncertain.
However, the trend may be to seek out alternatives to the arm’s-length
principle (ALP) and possibly even a completely different international tax
system.
“The principles are not going to be the same as the arm’s-length
standards that govern international transactions,” Sample said. “The objective
of pillar one is to allocate more income to the marketing jurisdiction away
from the R&D and production jurisdictions – even though there may be no
business activities in the marketing jurisdiction in many cases. That’s quite different
to the current arm’s-length principle.”
“Whatever the arm’s-length standard is for the modest allocation,
there needs to be a firm consensus among the governments on the mechanism in
place,” he explained. “Some governments are going to have to give up tax
revenue for others to gain revenue.”
Many technology companies fear that the outcome of the OECD
talks will be more double taxation and legal problems. The danger is that if
governments fail to abide by the rules there could be irreconcilable disputes
all over the world.
Yet it is not clear if the OECD is about to abandon the ALP
either. Even though the organisation has made it clear that it is willing to
“look beyond” this fundamental principle. The documents released still fall
back on the ALP in all but a couple of instances.
“The arm’s-length principle still plays a significant role in the
pillar one items with the exception of the significant economic presence proposal
and formulary apportionment,” Sample pointed out.
“Pillar one is about allocating incremental, non-routine returns
to the marketing jurisdiction and there is still a significant role for arm’s-length
pricing to play in computing that allocation,” he
added.
There are good reasons for businesses to fear the erosion of arm’s
length. Some companies would argue that the OECD has already gone too far down
this road.
“The nice thing about the arm’s-length standard is that it
does give you a common basis for transacting in a variety of situations,
regions and operating models,” one tax director at a chemical company said.
“When you talk about digital apportionment you are almost
singling out and identifying certain taxpayers to pay more than other
taxpayers,” the tax director told TP Week.
“This creates incentives that you may not like.”
At the same time, the ALP still seems to be out of date in a
global economy rich with hard-to-value intangible assets and ‘disruptive’
business models. The difficulty of putting a price tag on certain intangibles
is why many tax administrations are turning towards a value chain analysis.
“Arm’s length is still workable, it still gives the right
result in a lot of cases,” said one head of international tax at a software
company. “It’s more of an art than a science when it comes to data and
comparable sets.”
Arm’s-length pricing has been a key fiscal principle for decades.
It’s going to be difficult for the international community to move away from
this deeply entrenched standard. But this is not the only possibility.
“You can bend the arm’s-length principle without breaking it,”
Sample said. “There are also ways to allocate a pool of income that are a
little more accurate than formulary apportionment. You could say formulary
apportionment is brutally simple.”
When it comes to positive solutions, Sample sees the
residual profit split method (RPSM) as a possible route out of this
predicament. He suggested that the complexity of the method is not a problem
for large-scale corporations and it might actually end up being simpler for
governments in the end.
“The residual profit split is probably the most accurate way to
determine how to attribute non-routine profits to the marketing jurisdiction,”
he said. “Once you’ve done that you can allocate very easily, it’s just a
question of a percentage.”
Bill Sample
was speaking in a personal capacity in this interview.
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