By Julie Martin, MNE Tax
In a surprising development, US Treasury Secretary Stephen Mnuchin has revealed that the US no longer supports key elements of the OECD’s compromise proposal to overhaul the rules for allocating multinational group profit and related taxing rights among countries. Mnuchin said the US is willing to explore a new, alternative, “pillar one” proposal, though.
The aim of the OECD compromise plan, known as the “unified approach to pillar one,” released October 9, is to promote agreement among a coalition of 135 countries known as the “Inclusive Framework on BEPS” on a coordinated update to the international tax and transfer pricing rules to better account for new digital business models.
In a December 3 letter to OECD Secretary-General Jose Angel Gurria, the US Treasury Secretary has reiterated the US’s firm opposition to unilateral digital taxes but has now also signaled that the US disagrees with aspects of the “pillar one” proposals under discussion.
“[W]e have serious concerns regarding potential mandatory departures from arm’s length transfer pricing and taxable nexus standards — longstanding pillars of the international tax system upon which US taxpayers rely. Nevertheless, we believe that taxpayer concerns could be addressed and the goals of Pillar 1 could be substantially achieved by making Pillar 1 a safe-harbor regime,” Mnuchin wrote in the letter, obtained by KPMG.
Thus, it appears that the US will not likely support the OECD’s compromise “unified approach” approach to pillar one because the OECD plan does, in fact, abandon the longstanding physical presence standard for determining nexus and also uses a formulaic approach, rather than the arm’s length principle, to allocate some profit to market or user jurisdictions.
What is unusual about the US position is that US tax officials previously promoted the same provisions that they now question.
Gurria notes this in a December 4 letter replying to Mnuchin, stating “it was . . . your personal interventions at G20 meetings that moved the discussion to a broader scope using a more formulaic approach and a new nexus concept that moved us beyond the tax rules as they currently stand.”
As early as December 2018, US officials expressed support for a compromise proposal that uses formulas for simplicity and that revises the nexus rules to grant additional taxing rights to countries where a multinational’s customers or users reside. The US position has been repeated by officials in different settings.
Gurria also said that Mnuchin’s suggested alternative pillar one safe harbor regime is a new proposal.
“Throughout the extensive consultation process, [on pillar one] we had so far not come across the notion that Pillar 1 could be a safe-harbor regime,” Gurria wrote.
The OECD has been racing to reach political agreement among Inclusive Framework nations by year-end on revised international tax rules to ensure adequate time to complete its work before the end of 2020. These timelines were agreed to by Inclusive Framework members in a work plan drawn up in May.
Gurria noted in his letter that bringing up the new concept of a safe harbor at such a late stage in the negotiations might affect the ability of the 135 counties participating to move forward to an agreement.
It is interesting to note that Mnuchin expressed his position on pillar one the day after the office of the United States Trade Representative (USTR) published its conclusion that France’s digital services tax discriminates against US multinational tech companies and proposed retaliatory tariffs on French goods. The USTR further said that it is exploring whether to also open Section 301 investigations into the digital services taxes in Austria, Italy, and Turkey.
Perhaps the US now believes that it is better off stopping countries from imposing unilateral taxes on digital firms through the use of tariffs and other forms of retaliation than pursuing an internationally coordinated agreement to update to the international tax framework?
Gurria closed his letter to Mnuchin with an invitation to meet in Paris with French Minister Bruno Le Maire, ideally before Christmas. If this meeting takes place, we may soon have a clearer understanding of the US’s intentions.
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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