By Julie Martin, MNE Tax
The 137 countries that make up the “Inclusive Framework on BEPS” are having a difficult time reaching agreement on an update to the global rules for allocating multinational group profits among nations, according to Pascal Saint-Amans, OECD Center for Tax Policy and Administration. Saint-Amans warned that US MNEs could be harmed if countries are unable to agree.
Speaking at a Tax Policy Center conference on May 21, held via Zoom, Saint-Amans suggested that the US bears some responsibility for the lack of agreement. The US has been “sending contradictory messages on pillar one,” Saint-Amans said, and many countries find the latest US proposals for pillar one “hard to accept.”
The OECD based its unified approach to pillar one on US proposals and sought worldwide agreement on that plan. Last December, though, after the plan was appearing to gain some traction, US officials announced that the US would only support a global tax deal if pillar one was drafted as a “safe harbor.” Further, US officials said that, unlike the unified approach, the reform should also be extended to businesses that are not consumer-facing. US officials later explained that they were unable to convince US businesses to sign on to the original plan and, absent that support, Senate passage of the unified approach would be impossible.
The Inclusive Framework countries decided to defer a decision on the US amendments until after the architecture of pillar one was agreed upon; however, the time for such agreement is closing in fast as the agreed-to deadline for reaching the deal among countries is the end of 2020.
Saint-Amans said that US multinationals should stop trying to thwart the global agreement by seeking delays.
Many countries are poised to impose unilateral taxes on digital firms if a global agreement can not be reached, Saint-Amans warned, noting that such proposals have been advanced by Indonesia, Nigeria, India, Egypt, France, the UK, Austria, Spain, Italy, and Turkey. Moreover, he said the COVID-19 crisis has had an impact on international trade which may lessen the US’s ability to threaten section 301 trade retaliation should countries adopt unilateral measures.
Another impediment to an agreement, Saint-Amans said, is that some countries now want the pillar one reallocation of taxing rights limited to digital companies, contrary to the US and China’s position.
Saint-Amans said some countries disagree with those that claim that the digital economy cannot be ring-fenced. They argue that the COVID-19 pandemic reveals natural ring-fencing because main street shops are now closed while digital businesses are open and delivering goods to their customers.
Saint-Amans said that striking a deal on pillar one at the October Inclusive Framework meeting may not be possible. “We will see of October is realistic or if more time may be needed,” he said. Still, he said that as an outcome of that meeting, “having something tangible on digital would be highly expected.”
Saint-Amans said that countries may turn to additional taxation through pillar two to fund the massive increase in spending from COVID-19. He said that because of these budget issues, countries are also much less likely to tolerate multinationals that locate profits in low tax jurisdictions.
According to Saint-Amans, “[t]here is a fair chance to see something very significant in October on pillar two,” as long as countries agree to grandfather the US GILTI rules, which is expected.
Only China and tax havens have concerns with pillar two, Saint-Amans said. He added that it is up to the tax havens if they want to be a part of the process or want to be a target.
Julie Martin
Julie Martin is the founder of MNE Tax. She edits the publication and regularly contributes articles on new developments in cross-border business taxation.
Julie has worked as a tax journalist and editor for more than 13 years. Prior to that, she worked as an in-house tax attorney in New York. She also holds an LLM in taxation from New York University School of Law.
Julie can be reached at [email protected].
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