Tax directors speaking at the Oxford Saïd Business School’s debate on pillar one and pillar two of the OECD digital tax proposals were sceptical that a deal could be reached by next summer, which is the OECD’s self-imposed deadline for an agreement. The COVID-19 pandemic has slowed progress, while the US election result and impending change of administration may delay talks further.
“I don’t think fundamental change is necessarily possible, and certainly not in this context… maybe [COVID-19] makes it more important, but it certainly makes it more difficult,” said Amy Roberti, head of US federal government relations at Proctor and Gamble.
However, tax directors agreed with Pascal Saint-Amans, director of the Centre for Tax Policy and Administration at the OECD, that significant progress can be made in the next seven months.
While a full agreement may be unrealistic, tax directors would like to see countries reach a broad consensus on the scope of BEPS 2.0. Speakers were also concerned that double taxation has not been sufficiently addressed in the OECD talks, while Saint-Amans tried to assuage worries about the long-term future of unilateral measures.
Creative tax planning
Tax directors would like clarity on what will happen to unilateral tax measures once an OECD solution is reached. Countries are introducing unilateral solutions to taxing the digital economy, including digital services taxes (DSTs), as they wait for an OECD agreement. Meanwhile, the UN is also working on an alternative solution.
Unilateral and uncoordinated measures increase complexity and raise the risk of double taxation for multinational enterprises (MNEs). Glenn Price, deputy group tax director at Vodafone, noted that as the telecommunications sector is already subject to unilateral taxes called “telecoservices taxes or TSTs”, the prospect of additional unilateral taxes is concerning.
“Those unilateral taxes do cause double taxation; that’s their design. They do have administration costs, quite extensively, and they do harm growth and investment,” said Price.
Tax directors would like to see clarification from the OECD on what constitutes a unilateral measure, and a commitment to address all current and future unilateral taxes, to minimise double taxation risks.
Saint-Amans said that while it is “perfectly legitimate for businesses to be concerned” about unilateral measures, countries will be “ready to dismantle” their DSTs when an OECD agreement is achieved because unilateral measures are “not a question of money, but of symbolism”. The OECD director reassured tax professionals that an agreement next summer will address the withdrawal of unilateral measures.
However, advisors have told ITR that the EU may not need to remove its proposed digital levy to reach an international agreement.
Double taxation risks also arise from other areas, including Amount A under pillar one. The inclusive framework outlined three types of taxable profit that can be allocated to a jurisdiction: A, B, and C. Amount A is defined as “a share of residual profit allocated to market jurisdictions using a formulaic approach applied at an MNE group (or business line) level”.
Barbara Angus, global tax policy leader at EY, pointed out that, as things stand, Amount A would be allocated to a market without regard to the amount of profit already in that market. This leaves MNEs open to double taxation and could encourage creative tax planning that borders on non-compliance.
“Finding a way to make a better connection between how much gets allocated under Amount A, based on how much you already allocate, seems important. Otherwise I think you create an incentive to find a way to change the transfer pricing,” said Angus.
Price suggested that tax departments could assist the OECD to minimise the risk of double taxation and ensure a solution is palatable for companies. “More multinationals need to run the maths and look at all the complexities the proposals are creating… we need to work with the OECD,” said Price.
The scope of BEPS 2.0
If nothing else, tax professionals would like to see an OECD consensus on the fundamental scope of the project by mid-2021. “Having underlying principles in a project where you’re never going to be able to answer every question is essential,” said Angus.
This is a big question because the proposals will significantly reform international tax principles. Angus said that “referring to this project as BEPS 2.0 is a bit of a misnomer” because the new project is so different to the original BEPS proposals.
The scope of pillar one covers automated digital services (ADS) and consumer facing businesses (CFBs), and Price said that while many MNEs accept new nexus rules as an appropriate reaction to the changing commercial landscape, there are some issues.
“Many consumer facing businesses really feel challenged by this… the pillar one proposals are disproportionate to the challenges that consumer facing businesses may or may not create,” said Price, adding that the inclusion of CFBs “feels much more about politics rather than policy”.
Agreeing the scope is the most political and contentious issue of today, and it is made more difficult because of the pressure to reach an agreement that includes the US.
Tax directors suspect that the Biden administration will retain aspects of the US’s historical position on international taxes. Angus pointed out that the refusal to ring-fence digital businesses began under former President Barack Obama and continued under President Donald Trump. “We can expect to see some continuation,” said Angus.
However, panellists were hopeful that the bipartisan distaste for DSTs and unilateral taxes in the US will pave the way to a multilateral solution with the OECD.
Speakers at the session warned against pinning hopes of a solution onto the summer of 2021. Michael Devereux, director of the Oxford University Centre for Business Taxation, said it is “extremely unlikely that we’re going to have the basis of a stable taxation system going forward for decades in the next six months”.
Instead, the international tax community should focus on the progress that can be made within this time frame. Saint-Amans said that the OECD is aiming for a political agreement on key elements of pillar one, with an agreed timescale for full implementation of the proposals. In addition to this, tax directors want unilateral measures and double taxation risks to be addressed.
On this point, tax professionals should remember that they have the option to “run the maths”, in Price’s words, and take an active role in shaping BEPS 2.0 to minimise risk for MNEs. This is not just a forum for politicians.
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