Why BEPS 2.0 makes tax heads nervous

Author: Alexander Hartley

Some tax directors are unimpressed by the direction of the OECD’s digital tax proposals, with one warning they will bring “a whole new world” with wide-ranging implications

Tax professionals worldwide are digesting the new policy direction heralded by the OECD’s January 29 policy note. Some of them are dissatisfied with the new nexus-determination and apportionment ideas in the plans.

"I think as usual the academics and the people driving the policy-making decisions are getting out in front of their skis," said the head of tax at a large US tech company.

"They have solutions in search of a problem," they continued, questioning why the digitalisation of the economy ought to merit such a large-scale response. "I doubt policymakers went through the same amount of angst when Sears Roebuck invented the mail-order business and with the advent of the telephone and telephone solicitations."

What’s more, they said, the two-pillar approach will go far beyond the digital economy. "They’re trying to reallocate taxing principles just by where revenue is derived, as opposed to activities in that jurisdiction. It’s a whole new world and way of looking at things."

Hany Elnagger, head of EMEA tax at Ericsson, described the proposals as a mixture of the ambitious and the self-defeating.

"With the first pillar, which proposes to go beyond non-routine returns and the arm’s-length principle, I’d ask: are countries ready for this now?" he said to International Tax Review.

"We witnessed a lot of issues in middle-eastern countries implementing automated systems – so how about digitalisation itself? What about countries that have only just implemented transfer pricing, like Saudi Arabia?"

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As for the second pillar, Elnagger expressed reservations about the efficacy of a minimum corporate income tax rate.

"The proposal does not change the fact that countries or jurisdictions remain free to set their own tax rates or not to have a corporate income tax system at all. So, what’s the benefit to proposing this?" he asked.

However, he commended aspects of the note that dealt with tax simplification and collection best practice. Making tax administration and collection simple and effective "should be an obligation now," he said.

But simplicity is a pipe dream according to one lawyer speaking at the same time as the OECD was releasing the policy note.

Michel Collet, tax partner at CMS Francis Lefebvre, told the International Bar Association conference on February 29 that profit allocation would be the most contentious part of a global solution to the taxation of the digitalised economy – the aim of BEPS Action 1.

"The profit-allocation method is even more difficult" than the definition of nexus that member countries of the Inclusive Framework countries are working on, he said. This would require "profit allocation around a nexus in every country – which basically is [determining] how much profit of a multinational is located in a country," Collect explained.

"There is more disagreement, as I understand, among the countries, around the definition of the profit-allocation rules than there is disagreement on the footprint," he added.

Some choose to wait and see

In spite of the level of uncertainty around how the rules will be devised, scanning the OECD note to divine the future of the global tax system is not at the top of every tax director’s list of things to do.

The head of tax at one multi-billion dollar technology company suggested to ITR that they had not prioritised tracking the potential implications of the speculative proposal, though they might look at what has emerged in the weeks to come.

Given the difficulties involved in creating consensus around such consequential measures, it is understandable that some are taking a wait-and-see approach.

Meanwhile, tech CEOs and US politicians have continued to push back against European countries’ unilateral introductions of indirect digital services taxes (DSTs).

The CEOs of European digital companies including Spotify, Booking.com, and Zalando wrote to the EU’s finance ministers to say that DSTs "create a harmful legal precedent" by taxing revenue rather than profits, according to Bloomberg.

In addition, the senior Republican and Democratic members of the US Senate Finance Committee wrote to US Treasury Secretary Steve Mnuchin to express "serious concern" about the taxes.

"It is important that you make clear to the representatives of these countries the need to abandon unilateral actions and work through the multilateral process at the OECD," they told Mnuchin.

The OECD’s January 29 policy note, they wrote, "shows the process is moving forward".

The organisation strives to include the business community when drafting policy and there will be further opportunities for companies to give their views, and governments will also have their say, so the plans are likely to undergo significant modifications before they are enacted.

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