OECD and G20 seek to rewrite international tax rules

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On May 31, 2019, the Inclusive Framework on Base Erosion and Profit Shifting (BEPS) released a program of work to address what it terms “the tax challenges arising from the digitalisation of the economy.” If you have been paying attention to this process, you might call the proposed program of work “ambitious.” If you have not—and are now waking up to this project—you might call it “jaw-dropping.”

The Inclusive Framework on BEPS consists of a large group of jurisdictions that have agreed to implement a collection of measures addressing purported base erosion and profit shifting actions by multinational corporations.1 It grows out of the BEPS project launched by the Organisation for Economic Cooperation and Development (OECD) and endorsed by the Group of Twenty (G20).2 The BEPS project has so far resulted in significant changes in many countries’ domestic tax laws, income tax treaties and tax administration. Nonetheless, the BEPS Action Plan adopted in 2015 did not go far enough in one of its action items (Action Item One, addressing the tax challenges of the digital economy) to suit many jurisdictions.

The Programme of Work to Develop a Consensus Solution to the Tax Challenges Arising from the Digitalisation of the Economy (the Program of Work), released on May 31, 2019, squarely takes on this unfinished business, not just for companies engaged in digital commerce but for all multinational companies. The Program of Work readily acknowledges that concepts need to fleshed out, political buy-in has to occur and detailed (and practical) proposals for implementation need to be developed. Recognizing the challenges, the Program of Work sets forth a process and timetable for pursuing these goals. Although the implications of the Program of Work are varied and wide-ranging, it can be summarized in six basic points:

1. It’s only a failure if you quit trying

Developing new tools to tax the digital economy was clearly an important part of the original BEPS project. After all, it was Action Item One in the BEPS Action Plan. The Program of Work and its preceding reports3 are a second and concerted attempt to ensnare this elusive prey and to permit jurisdictions to tax companies with significant digital presences and platforms in instances in which current international tax rules prohibit such taxation. The Program of Work and its preceding reports are not simply a do-over, with jurisdictions in the Inclusive Framework wishfully hoping for better results this time. Rather, those jurisdictions are betting that the implementation of BEPS Action Plan has generated the experience and momentum they need to attain goals that were too ambitious even a couple of years ago. The more than 200 written submissions and more than 400 participants in the March 13–14, 2019 public consultation in Paris suggest that this bet is not an entirely speculative one.

2. From highwaymen to toll collectors

Absent coordination by members of the Inclusive Framework, jurisdictions are likely to continue to adopt unilateral tax measures to deal with the digital economy. Paragraph 11 of the Program of Work warns that “A growing number of jurisdictions are not content with the taxation outcomes produced by the current international tax system, and have or are seeking to impose various measures or interpretations of the current rules that risk significantly increasing compliance burdens, double taxation and uncertainty.” This would leave multinational corporations at the whims of these unilateral measures, potentially waylaid by jurisdictions operating outside the legally established international order.

The Program of Work decries this potential “proliferation of uncoordinated and unilateral actions [that] would not only undermine the relevance and sustainability of the international framework for the taxation of cross-border business activities, but will also more broadly adversely impact global investments and growth.” It would be far better if countries could tax these multinational corporations in a more systematic and predictable way. Looked at that way, one has to acknowledge that setting up tollbooths along the information highway is a much more civilized way to collect money from those traveling along it.

3. Feeling the need for speed

The Inclusive Framework on BEPS will report progress made so far to the G20 Finance Ministers in June 2019, and it plans to deliver a long-term and consensus-based solution in 2020. The Program of Work notes that the “timeline is extremely ambitious given the need to revisit fundamental aspects of the international tax system, but is reflective of the political imperative that all members of the Inclusive Framework attach to finding a timely resolution of the issues at stake.”4 In other words, the Program of Work has to be done on a compressed timetable because the countries involved are impatient to start taxing these companies. That, of course, is an excuse rather than a valid rationale. However, as every parent knows, a deadline’s effectiveness is a function of how strictly one enforces it, not one’s reasons for setting it. And if one is focused on achieving a politically charged outcome, and views “details” as exactly that, setting a compressed and arbitrary timetable can be an excellent way to channel the onslaught of critical comments.

4. Improving your hand by changing the rules

Many countries view companies involved in digital commerce as earning significant revenues from their residents and are frustrated that current international tax rules limit their ability to tax those revenues. These countries could defy international norms and seek to tax the companies in novel ways, but most countries are concerned what will happen if they act in isolation. They might get more revenue, but they may also irritate the voting public if the targeted companies start reducing services or passing on the tax to customers in those countries. Bravery may win you medals, but not tax revenue.

So, the goal of Pillar One of the Program of Work is to achieve consensus among countries by expanding both their right to tax companies and the amount of income that countries in which customers reside would be permitted to tax. Thus, current nexus rules would be expanded to permit jurisdictions to tax companies without a physical presence in that country. In addition, the rules for allocating profit would be revised so that market countries could tax a greater portion of the income of multinational groups.

5. Don’t feel GILTI if you can’t BEAT them—imitate!

Pillar Two of the Program of Work is to develop a global anti–base erosion proposal. Unlike Pillar One, which is focused on what it describes as “digitalisation,” the new rules of Pillar Two would be applicable to all multinational groups. A lot of details have to be worked out, but--for better or for worse—the basic concepts resemble the global intangible low-taxed income (GILTI) and base erosion and anti-abuse tax (BEAT) provisions recently enacted by the United States as part of the Tax Cuts and Jobs Act. In a further nod to the US tax rules, the name of the new tax proposal in Pillar Two conveniently works out to have a cute acronym, “GloBE.” At this rate of similarity to the US approach, the next version of the Program of Work will probably use a “z” in digitalisation.

A future without prejudice

The Program of Work and the reports preceding it have been clear that the proposals are being explored “without prejudice.” At the exploratory stage, that convention makes sense; otherwise, there would be nothing to explore if each of the nearly 180 jurisdictions in the Inclusive Framework could take proposals off the table. Nonetheless, the BEPS process is politically driven, and for the Program of Work to be successful the proposals developed must not only be palatable to jurisdictions pushing the Program of Work, but also have sufficient buy-in from those countries that do not see themselves as beneficiaries of the changes proposed by Pillars One and Two.

The Program of Work understandably defers wading into these treacherous political waters. For example, the discussion of Pillar One is much more clear as to who will get more, rather than who will get less. The same is implicitly true in Pillar Two. Still, the political fights will have to take place; expect them to occur early in the process of fleshing out the proposals. A jurisdiction that waits too late is faced with standing in front of a speeding train. A more successful strategy would be influencing where the tracks are being laid.

  1. The Inclusive Framework consists of 129 jurisdictions, as of last count: https://www.oecd.org/tax/beps/inclusive-framework-on-beps-composition.pdf.
  2. Background on the BEPS project and the Inclusive Framework can be found here: https://www.oecd.org/tax/beps/beps-about.htm.
  3. See, e.g., “Addressing the Tax Challenges of the Digitalisation of the Economy” (January 23, 2019).
  4. Paragraph 12.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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