OECD director, tax experts, explore proposed “unified approach to pillar one” for taxing multinational groups

By Julie Martin, MNE Tax

The OECD Secretariat’s proposed “unified approach to pillar one,” designed to encourage agreement among countries on how to rewrite the international tax and transfer pricing system to better account for digital business models, was the focus of the sixth annual Tax Sunday event, held October 20 in Washington, D.C.

The meeting, co-sponsored by the International Monetary Fund and the World Bank Group, featured presentations and discussion by leading tax experts from OECD, government organizations, civil society, business, and academia.

Here are some highlights:

• Echoing comments made earlier this week, Pascal Saint-Amans, Director, Centre for Tax Policy and Administration at the OECD, said the OECD Secretariat’s proposal for a unified approach to pillar one was meant to break a deadlock among countries that were going “round and round” in their discussion about how to best update the international tax rules. He said that while he understands complaints that the process is moving too rapidly, especially for developing countries that lack capacity, it is not wise to slow it down. Saint-Amans said that absent agreement, the international tax system will likely enter into a period of chaos. Like the situation now between France and the US, lack of resolution the international tax conflict will degenerate into trade wars, he warned.
• Saint-Amans said he did not envision that countries would agree to set the Amount B profit much higher than a commissionaire return. Even if the return is low, this could result in a large amount of additional tax for developing countries, he said. The compensation set in Amount B would be a rebuttable presumption, not a safe harbor, he said.
• He also said that it might make sense to exclude the financial services industry from Amount A because the industry is mostly involved in business-to-business transactions, which are already excluded, and because the business-to-consumer element is heavily regulated, creating an alignment between profits and client location. He said that, typically, extractive industries are also not consumer-facing and should thus be excluded. The goal is to not allocate profits away from developing countries, where extractives are typically located. Extractive industries that locate portions of their profits in tax havens should be dealt with through other methods, he said.
• Saint-Amans also said that to avoid double tax, more work needs to be done to identify the residence country or investment hub that surrenders the portion of residual profits that is transferred to market countries in Amount A. He acknowledged that developing countries would not agree to mandatory binding arbitration but said that other tools are available. Maybe lessons learned from the ICAP pilot program could be applied here, he said.
• He said that the OECD Secretariat did not provide a unified approach for pillar two because there was not the same degree of divergence of opinion among countries on how to structure it as in pillar one. Pillar two would operate similar to the hybrid mismatch rules developed in the BEPS project in that the incentive to locate income in zero-tax jurisdictions will be reduced because the same income will be picked up in another country. He said the rules would be effective irrespective of which ordering rules for source versus residence jurisdiction is selected. Residence countries do not want to give up their priority over the income, he said.
• Martin Hearson, a Research Fellow at the Institute for Development Studies, addressed whether the OECD’s unified approach to pillar one plus pillar two meet developing country objectives of being simple to administer, providing a greater share of revenue to developing nations, and bringing digital service providers into the tax net. Hearson said that Amount B may be more important to countries with small markets than Amount A and would also be a simplification measure. Pillar two is beneficial, he said, because would take the pressure off of transfer pricing. Pillar one, Amount A, since it is layered on top of existing rules, amounts to simplification, Hearson said. Whether developing nations will gain revenue from the proposals will depend on the numbers decided, he said.
• Liselott Kana, Head of Department (International Taxation), Servicio de Impuestos Internos, Chile, said that to better protect their interests, countries might be better off forming coalitions based the types of industries that operate in their countries.  For example, countries with an extractive industry sector should band together to come up with a position favorable to them. She said questioned whether the UN was the best place to develop rules international tax rules for developing countries as its membership is comprised of both developed and developing nations.
• Marlies de Ruiter, Tax Partner and Global International Tax Policy Leader at EY, said that many multinationals are not aware of the pending international tax and transfer pricing changes. Companies think they are unaffected because they are not “digital” companies and don’t engage in tax avoidance. She noted that while the minimum tax rules might work to limit tax competition, she wondered whether poorer countries would react by simply offering companies subsidies to attract investment and jobs, rendering pillar two ineffective.
• Professor Stephen E. Shay, Senior Lecturer, Harvard Law School, said it is a “fantasy” to believe the tax rewrite “is a 2020 process.” Shay said the OECD’s pillar one unified approach is devoid of details except that it does not apply to extractive industries. Thus, it is not possible to talk about any policy implications. The process should be slowed down so that policymakers can “get it right” for developing countries, Professor Shay said. He also said that each country should determine its own threshold for physical presence and should give away taxing rights only by tax treaty. Further, he noted that although extractive industries are excepted from the Secretairiat’s unified approach to pillar one, these industries can also make use of tax havens.
• Irene Ovonji-Odida, Member, of the Independent Commission for the Reform of International Corporate Taxation (ICRICT), said that developing countries want rules that are simple to administer. The OECD’s unified approach is not simple because it adds a new layer to already complex rules. She said the unified approach does not go far enough toward unitary apportionment. She also said that the disparity in power between countries means that these new tax rules will be developed without developing country input, yet they will eventually seep into developing countries’ domestic laws and treaties.
• Vitor Gaspar Director, Fiscal Affairs Department, IMF, said that the public sees international tax issues emotionally and believes that multinationals unfairly minimize taxes. He said that this political reality can not be ignored. Global action is needed to avoid unilateral action in taxation by countries, he said.

Moderating the panels were Michael Keen, Deputy Director, Fiscal Affairs Department, at the IMF, and Victoria J. Perry, Deputy Director, Tax Policy, Fiscal Affairs Department, at the IMF. Opening remarks were provided by Marijn Verhoeven, Lead Economist & Acting Practice Manager, Fiscal Policy and Sustainable Growth Unit, Macroeconomics, Trade and Investments (MTI GP),  of the World Bank Group.

Editor’s note: This article was corrected on October 21, 2019, to state that Martin Harson’s view is that Pillar one, Amount A, does amount to simplification. The original article incorrectly said that he did not believe the change was a simplification. We regret the error.

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Julie Martin

Founder & Editor at MNE Tax

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].

@mnetax

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Julie can be reached at [email protected].