OECD announces countries' plans to revolutionise international tax system

Author: Alexander Hartley

The OECD has stunned the tax world by signalling countries’ willingness to consider radical steps to drag the global corporate tax system into the 21st century by addressing the challenges of the evolving world economy.

In a January 29 policy note, it announced agreement to pursue two kinds of proposal for reforming the global corporation tax system. The leading proposal is believed to be for a destination-based apportionment of taxation rights for digital services, based on number of active users.

The note for the first time expressed a willingness among members of the Inclusive Framework on BEPS to go "beyond the arm’s-length principle", said Pascal Saint-Amans, director of the OECD’s Centre for Tax Policy and Administration.

The entire membership of the Inclusive Framework, including 95 nations that gathered in Paris last week to discuss the concepts, agreed to develop the ideas set forth in the note.

Two pillars

"There is agreement to examine proposals involving two pillars which could form the basis for consensus," the note said.

The pillars might be enacted separately, or together. Each represents a different conceptual approach to taxing companies that are able to generate profits in countries where they have little or no physical infrastructure.

The first, and more contentious, pillar concerns nexus and profit-allocation rules, including the so-called 'significant economic presence’ nexus discussed in the 2014 BEPS Action 1 report.

This proposal comes from the US, and is a leading contender among the Inclusive Framework participants due to the support of other high-population countries such as China, India and Brazil, fits into the first pillar. It would seek to apportion taxing rights based on the number of active users in a country, Saint-Amans said.

The second pillar consists of dealing with what the note describes as "remaining BEPS issues". Saint-Amans suggested that this was likely to involve something resembling the minimum corporate tax rate suggested last year by Germany and France. These bear some similarities with the BEAT and GILTI provisions of the US Tax Cuts and Jobs Act.

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The tax world reacts

Progressive taxation groups heralded the policy note as a momentous shift.

Alex Cobham, chief executive of the Tax Justice Network, tweeted: "The three pages of text in this [OECD] policy note may be more significant than the thousands that made up the BEPS project."

The report signals the OECD’s understanding of "the incompatibility of the arm’s-length principle with reality," he wrote.

The Independent Commission for the Reform of International Corporate Taxation (ICRICT) said: "This note shows clearly that the OECD is finally ready to engage on real reforms that ICRICT has constantly advocated for."

"The opportunity has now finally emerged to redesign international tax rules to make them fit for the twenty-first century."

Daniel Bunn, a researcher at the right-leaning Tax Foundation, was more cautious.

"The OECD seems committed to making some fundamental changes to international taxation," he told International Tax Review. But he cautioned that "it is important that [the OECD] also pay attention to economic costs.

"Increasing effective tax rates faced by multinationals could have significant spillover effects for trade, FDI, and global growth; some of the options would likely do just that, and the potential tradeoffs need to be evaluated."

EU’s digital tax effort goes on

Meanwhile, in spite of a failure to reach consensus in December, the European Commission is continuing its efforts to reach agreement on an interim digital advertising tax (DAT) to replace the earlier proposed European digital services tax (DST).

"The Romanian Presidency is continuing to work on a digital advertising tax (DAT) as proposed by France and Germany at the December ECOFIN meeting with the aim to reach agreement by March 2019," said Stephen Quest, the European Commission’s director general for taxation.

He cautioned against countries taking steps to tax the digital economy alone. "Unilateral measures risk fragmenting the single market and avoiding such risk is the reason why we need urgent and immediate action at EU level," he told ITR.

On other hand, he cautioned, "we [the European Commission] cannot tell member states not to apply their own national measures".

The Economic and Financial Affairs Council will meet in March.

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