By Julie Martin, MNE Tax
An OECD-led coalition of 137 countries known as the Inclusive Framework on BEPS failed to reach agreement on a coordinated update to the international tax rules at their October plenary meeting, OECD officials today confirmed. Consensus was not reached on either the Pillar One or Pillar Two blueprints, officials said.
The OECD did release new reports discussing the Pillar one and Pillar two blueprints, approved by Inclusive Framework members, which describe some areas of general agreement, areas of disagreement, and discuss next steps.
Importantly, these two documents will become the subject of public consultation. The deadline for written comments is December 14; the OECD will hold a public hearing mid-January.
The OECD also released an impact assessment of the Pillar One and Pillar Two proposals today, though details about the effect of the two proposals on particular countries were not released. Inclusive Framework members still won’t agree to the public release of country-by-country impact assessments.
During webcasts held today, OECD officials expressed disappointment about the outcome of the Inclusive Framework meeting as the original goal had been to reach an agreement by year-end, and meeting that objective is no longer possible. The Inclusive Framework now seeks to achieve consensus on a global tax update by mid-2021.
OECD Secretary-General Angel Gurria said that the negotiations were hampered by the country delegates’ inability to meet in person because of COVID-19 restrictions, but he also acknowledged that political differences played a role in countries’ failure to agree.
Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration, said he worried that the lack of global progress will prompt some countries to adopt unilateral measures to tax the digital economy, which would lead to retaliation by the US and other countries and, in turn, trigger trade wars.
These fears seem well-founded as today the Independent Commission for the Reform of International Corporate Taxation (ICRICT) released a statement advocating in favor of governments moving unilaterally to introduce interim tax measures.
“The OECD’s announcement is bad news for multilateralism. It is time for powerful countries to consider global interest rather than protecting their own multinationals to deliver ambitious and comprehensive reforms. But if global reforms are hard to come by, it is time for countries to move unilaterally or at regional level to introduce interim measures. This will both deliver desperately needed resources now and create the necessary pressure to force change,” said José Antonio Ocampo, Professor at Columbia University and ICRICT Chair.
Speaking during an OECD webcast, Grace Perez-Navarro, Deputy Director of the OECD Centre for Tax Policy and Administration, noted that countries have yet to agree on very basic issues, including the scope of Pillar one, Amount A, and whether, as advanced by the US, the Pillar One reform should be made optional for multinationals.
Also unresolved is the issue of how much profit is considered residual profit and what percentage would be reallocated, Perez-Navarro said.
Perez-Navarro pointed out that broad agreement has been reached on many elements of the Pillar One reform. These areas of convergence provide a strong foundation for a future agreement, she said.
For Amount A, there is general agreement on the need for a new taxing right that is not based on physical presence and on a solution anchored in net basis taxation that uses a formulaic approach for allocating the profits for business within scope, she said,
Moreover, it is generally agreed that any solution should use thresholds, that consolidated financial accounts should be used as a starting point with limited book to tax adjustments, and that losses are taken into account (though how to do that must still be refined). It is also generally agreed that segmentation is required to determine the tax base with the addition of broad safe harbor or exemption rules to reduce complexity, she said.
Moreover, Perez-Navarro said that there is a commitment to make sure that double tax is eliminated in a multilateral setting, Countries also wish to advance work on Amount B to simplify transfer pricing calculations for baseline marketing and distribution activities, she said.
Perez-Navarro said that a Pillar One solution would include a new multilateral tax certainty process. For Amount A, a multilateral convention would be developed to implement the solution, she said.
Achim Pross, Head of the International Co-operation and Tax Administration Division noted that many elements of Pillar two are “stable,” He stressed that has become clear through the negotiations that a ‘subject to tax rule” must be an element of Pillar Two for any political agreement to be reached.
The OECD is very open to ideas from the public on how to simplify Pillar Two, Pross said.
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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