The 137 countries that are trying to reform global rules for corporate taxation, to address the challenges presented by the digital economy, were not able to reach a deal at virtual meetings last week.
The OECD/G20 Inclusive Framework on BEPS only agreed that the two-pillar approach members have been developing since 2019 provides a solid foundation for an agreement next year.
Pillar I seeks to establish new rules on where tax should be paid, the so-called nexus rules, and a fundamentally new way of sharing taxing rights between countries.
The aim is to ensure that multinational tech companies pay taxes where they conduct a significant amount of business, not just where they have a physical presence, as required under existing tax rules.
Pillar II would introduce a minimum level of tax that multinational companies must pay globally. The OECD argues this would address the remaining issues linked to base erosion and profit shifting by large corporations.
The measure squarely targets zero-tax and low-tax jurisdictions, including the Cayman Islands. A blueprint approved by the Inclusive Framework sets out rules that “would provide jurisdictions with a right to ‘tax back’ where other jurisdictions have not exercised their primary taxing rights, or the payment is otherwise subject to low levels of effective taxation”.
In a presentation on Monday, the Organization for Economic Cooperation and Development conceded that no agreement could be reached this year but claimed the international community had made substantial progress.
“We are not delivering the full agreement today,” Pascal Saint-Amans, head of tax policy at the OECD, said, “but the glass is half full.”
Negotiations around Pillar I have mainly been hampered by opposition of the US government, which feels the proposed reform predominantly targets US tech companies.
The OECD warned that not coming to an agreement next year could mean that countries act unilaterally by imposing digital-services taxes. This in turn would lead to an increase in damaging tax and trade disputes.
The US government has threatened in the past that it would retaliate against any such taxes that are applied to US tech companies.
The OECD said under a worst-case scenario – a global trade war triggered by unilateral digital-services taxes worldwide – the failure to reach agreement could reduce global GDP by more than 1% annually.
“It is imperative that we take this work across the finish line,” said OECD Secretary-General Angel Gurría. “Failure would risk tax wars turning into trade wars at a time when the global economy is already suffering enormously.”
In a joint statement, Inclusive Framework members declared that “despite their differences, and the COVID-19 pandemic, which has had an impact on the work, the members of the Inclusive Framework have made substantial progress towards building consensus”.
The Inclusive Framework released a package of reports on the blueprints of Pillar 1 and Pillar 2, which it said “reflects convergent views on a number of key policy features, principles and parameters of both Pillars, and identifies remaining political and technical issues where differences of views remain to be bridged, and next steps”.
Saint-Amans said, “There is agreement on the architecture of the fact that there must be a new nexus, that there must be a way to address the allocation of residual profits, but there are also disagreements on the scope and the modalities.”
The Inclusive Framework said it aims to resolve these technical issues, and develop model draft legislation, guidelines, and international rules and processes by mid-2021.
Following criticism of the lack of transparency surrounding the negotiations, the blueprints for the two pillars have been made publicly available.
Saint-Amans said, “We heard the criticism by a number of stakeholders that they had not had the opportunity to properly comment on the blueprints.”
The delay in the negotiations will now allow stakeholders to submit written comments on the proposals by 14 Dec. 2020, in a public consultation.
The OECD also released on Monday a new analysis of the economic impact of the corporate tax reform measures. It estimates that both pillars in combination could increase global corporate income tax revenues by up to 3.2%, or approximately US$80 billion, each year.
The global minimum corporate tax alone would grow tax revenues by 1.7% to 2.8%, or $42 billion to $70 billion.
Pillar I, on the other hand, would largely shift taxing rights from one country to the other, rather than increase tax revenues, with an estimated revenue expansion of only 0.2%-0.5%, or between $5 billion and $12 billion.
The costs borne by multinationals who would have to comply with the rules would be “relatively small”, the OECD analysis said. This is because the proposals would affect mainly highly profitable multinationals, whose investments are less sensitive to taxation.
However, the OECD noted that the effect on investments and GDP would be negative.
“Overall, the negative effect on global GDP stemming from the expected increase in tax revenues associated with the proposals is estimated to be less than 0.1% in the long term,” the OECD study said.
But lower tax-rate differences would reduce the incentives for profit shifting and could improve the allocation of capital.
In any case, the OECD claimed, the alternative scenario of unilateral digital-tax measures would be worse.
The analysis further found that the COVID-19 crisis is likely to accelerate the trend towards digitalisation of the economy and will therefore exacerbate the existing tax challenges if no agreement is reached.
Inclusive Framework members agreed in their joint statement that the COVID-19 pandemic has increased “public pressure on governments to ensure that large, internationally operating, and profitable businesses pay their fair share and do so in the right place under new international tax rules”.
With regard to the proposed minimum corporate tax paid by multinationals globally, the Inclusive Framework said, “We acknowledge that jurisdictions are free to determine their own tax systems, including whether they have a corporate income tax and the level of their tax rates, but also consider the right of other jurisdictions to apply an internationally agreed Pillar Two regime where income is taxed below an agreed minimum rate.”