March 18, 2019
OECD hosts public consultation on document proposing significant changes to the international tax system
The Organisation for Economic Co-operation and Development (OECD) hosted a day and a half-long public consultation on 13-14 March on its document entitled Addressing the Tax Challenges of the Digitalisation of the Economy. The sessions were chaired by the French and US government representatives who serve as co-chairs of the OECD Task Force on the Digital Economy. Government representatives from about 60 countries attended the consultation. The OECD received over 200 comment submissions on the consultation document that was issued on 13 February. Representatives from business, labor groups, non-governmental organizations (NGOs), and academia participated in the consultation to discuss their perspectives on the proposals outlined in the OECD document. EY submitted a and a global team of EY representatives participated in the consultation.
The OECD laid out a timeline through 2020 for advancing work on the proposals and reaching consensus on a coordinated global approach. Dozens of stakeholders urged caution in the development of the details of what potentially are sweeping changes to long-standing rules for determining taxing jurisdiction over business profits and broad new anti-base erosion rules that go well beyond the 2015 Base Erosion and Profit Shifting (BEPS) project recommendations. Many stakeholders also expressed the view that some changes to the international tax system are inevitable to better align the taxing rules with the new global economy. Because the consultation was intended as an opportunity to hear from stakeholders, the government representatives who attended were largely in listen mode and did not share their views during the sessions. Information regarding the consultation is to be shared with the Inclusive Framework on BEPS, which now has 129 countries participating.
The OECD consultation document includes two separate sets of proposals, referred to by OECD officials as pillar one and pillar two. Pillar one involves revised profit allocation and nexus rules aimed at expanding taxing rights of the user or market jurisdiction based on the existence of certain intangible assets, including so-called marketing intangibles. Pillar two involves two integrated global anti-base erosion rules: an income inclusion rule likened to a minimum tax on profits and rules for taxing so-called base-eroding payments (accomplished through the denial of tax deductions or treaty benefits for payments that are not subject to a minimum level of tax).
The first day of the consultation focused on the pillar one proposal for revising profit allocation and nexus rules to allocate more value to user or market jurisdictions. The discussion suggested that some change to traditional nexus and transfer pricing rules may be inevitable, with virtually all commentators seeming to agree that changes to these rules are needed while vigorously debating the scope and detail of such changes. The second half day of the consultation was devoted to pillar two and generated more diversity of view among participants, with many business representatives expressing caution or even opposition to the proposal for new global standards relating to minimum taxes.
Discussion on process and timeline
Brian Jenn, Deputy International Tax Counsel, U.S. Department of the Treasury and co-chair of the OECD Task Force on the Digital Economy, began the consultation, saying a work plan is being developed during this early stage. In comparison to the BEPS project, the current effort is at the same stage as when the OECD was developing the BEPS Action plan in 2013. Grace Perez-Navarro, Deputy Director of the OECD Centre for Tax Policy and Administration, described key steps that will be taken between now and the end of 2020. Following the consultation, there will be more thorough analysis of the comments received and meetings of the steering group of the Inclusive Framework on BEPS in April and May. A work plan for the project will be developed and presented to the Inclusive Framework at the end of May for approval. It will then be presented to G20 Finance Ministers at the beginning of June and to G20 leaders at the end of June.
Once the work plan is adopted, the various OECD working parties will begin what was described as “the hard technical work.” OECD officials made clear that discussion drafts will be released for public comment and that they expect this process to begin in late 2019 or early 2020. The OECD objective is for the Inclusive Framework to agree on and make public the final consensus outcomes by the end of 2020.
Officials stressed that this public consultation would not be the only chance for stakeholders to have input into the process: a year-and-a-half more of work is yet to come, and there will be further opportunities for input, they said. Both Jenn and Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration, noted that there was no public consultation in advance of the development of the BEPS Action plan in 2013. Saint-Amans quipped that the 13–14 March public consultation drew a big crowd for a “tax party” — underscoring the high level of interest at this very early stage of the design of possible solutions.
Discussions on pillar one — revised profit allocation and nexus rules
The first day’s discussion on pillar one demonstrated a shared view among all participants that the economy has changed dramatically and will continue to change due to digitalization. There also was general recognition that nexus and transfer pricing rules need to change accordingly, including the need for some movement either within, or potentially even away from, the arm’s-length principle. There was a marked lack of consensus, however, around how significant the movement should be, with some from the business community arguing that adoption of a more multi-sided formulaic approach for allocating taxing rights to user or market jurisdictions should not be pursued or, if considered, should be as narrow and simple as possible, while NGOs and academics advocated more dramatic changes. As an alternative to a multi-sided formulaic approach, some discussed a potential one-sided mechanical profit allocation approach in which a minimum sales-based return to a market jurisdiction would be guaranteed.
Points of agreement during the discussion included the following:
While the general recognition of the need to develop some new global standards seemed clear, conflicting views were expressed regarding both the process and the technical details of any new standards:
Discussion on pillar two — global anti-base erosion rules
The four-hour discussion of the global anti-base erosion proposals on day two lacked the general agreement around the need for some change that characterized the first day’s discussion of pillar one. In fact, many commentators questioned the need for further anti-base erosion measures after the 2015 BEPS recommendations, and business representatives urged the OECD to do a better job of identifying the base erosion problems that are perceived as remaining to be solved prior to any further work developing minimum tax and other potential solutions. Moreover, the potential for distortive effects on real economic activities was considered a significant risk. At a minimum, these commentators suggested that the OECD should progress with its work on pillar one and should only come back to examining the pillar two proposals once that work is completed.
Organized labor representatives, however, disagreed. They maintained that a tax rate “race to the bottom” among developed countries continues even after the BEPS work was completed and BEPS measures are being implemented. They further argued that developing countries are paying the price as they lack adequate revenues to fund infrastructure investments, education, etc. Not all the NGOs agreed with that, however, with some NGOs stressing the importance of simplification and more robust minimum substance measures, while questioning the complexity of the proposals for minimum tax rules.
Participants also weighed in on the following issues:
The proposals in the OECD document have implications well beyond digital businesses or digital business models and could lead to significant changes to the overall international tax rules under which multinational businesses operate. Implementation of major changes in the international tax architecture — whether through a global consensus reached in the OECD process or through unilateral measures adopted without coordination — is a current focus for many governments around the world. It is important for businesses to follow these developments closely as they unfold over the coming months. In addition, companies should consider taking the opportunity to share their perspectives both through the OECD comment process and directly with tax policy officials in the countries that are part of their global footprint.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP, Washington, DC
Ernst & Young Belastingadviseurs LLP, Rotterdam
Ernst & Young Société d’Avocats, Paris