Unanimity not required to update global rules for taxing multinational groups, OECD’s Saint-Amans says

By Julie Martin, MNE Tax

The OECD’s “pillar one” proposal to update the global rules for allocating multinational group profit and related taxing rights among countries can be implemented even if some “Inclusive Framework on BEPS” member countries object to it, Pascal Saint-Amans, director of the OECD’s Center for Tax Policy and Administration, said on October 17.

Moreover, the “pillar two” global minimum tax proposal does not require a significant number of countries to agree for the scheme to work, the OECD director said, speaking to reporters.

The OECD is trying to help a coalition of 134 countries, known as the Inclusive Framework on BEPS, reach a political agreement by the end of 2020 on updated international tax and transfer pricing rules to account for the digitalization of the economy.

The goal is to stop countries from enacting digital services taxes and other unilateral tax measures to make up for revenue losses stemming from countries’ inability to appropriately tax digital firms under the existing international tax and transfer pricing framework. Unilateral taxes have already been announced by several countries, including Italy, Australia, the UK, and France.

To promote international consensus, the OECD Secretariat on October 9 proposed a compromise “unified approach to pillar one,” which would allocate a greater portion of a multinational’s profits and related taxing rights to the countries where the multinational’s customers or users reside. The compromise plan was presented by the OECD Secretariat to G20 finance ministers at their meeting today in Washington D.C.

Political bargaining

According to Saint-Amans, any Inclusive Framework member country may block consensus on updated international tax rules and, thus, from a legal standpoint, all Inclusive Framework member countries are on an equal footing. The OECD director added, though, that being on an equal footing does not mean that unanimity is required for the new international tax rules to move forward or imply that the power wielded by each country in the process is equal.

“Now, we are pragmatic. If you have all the big guys and a significant chunk of the small guys saying ‘yes we [should] do it,’ then the thing happens. Everyone must be involved, though,” the OECD director said.

“Now, we are pragmatic. If you have all the big guys and a significant chunk of the small guys saying ‘yes we [should] do it,’ then the thing happens. Everyone must be involved, though,” the OECD director said.

Saint-Amans said that countries can be grouped into different “constituencies” with similar interests from the standpoint of the global international tax and transfer pricing system. The interests of these different constituencies —  wealthy countries, developing countries, small exporting countries, emerging economies, and investment hubs — can sometimes conflict, he said. The goal is to have countries in each group agree to updated international tax and transfer pricing rules, Saint-Amans said.

“If one group, in its entirety, says ‘sorry we don’t go,’ it is going to be hard,” Saint-Amans said. If, however, only one country in a group objects, say, only one developing country, it is likely that agreement on updated tax rules will go forward, the OECD director said.

Saint-Amans pointed out that while many countries would benefit if the pillar one revisions are adopted, small exporting countries, such as the Nordic countries, and investment hubs, such as Ireland, the Netherlands, Luxembourg, and Bermuda, may lose out, and some of these countries may be significantly affected. If the investment hubs team up with some wealthy countries to oppose a pillar one reallocation of profit to market countries, the plan might be defeated, he said.

He also said that the pillar one nexus thresholds may need to differ depending on the size of the country. Otherwise, smaller countries that have few consumers would have little to gain from agreeing to the pillar one compromise.

Saint-Amans said that, in contrast, pillar 2 could be applied by countries even if only two countries adopted it. The goal for pillar 2 is for countries to agree to a coordinated design for the rule, he said.

Developing country concerns

The OECD is trying to convince India and the other G24 countries that the combination of Amounts A, B, and C in the OECD Secretariat’s unified approach to pillar one, “does something similar” to the G24’s preferred significant economic presence/fractional apportionment approach, Saint-Amans said. Whether the OECD will be successful or not is still unknown. He also acknowledged, though, that what the OECD is proposing “is not big in terms of reallocation.”

The G24 approach, Saint-Amans said, provides that a multinational’s purely digital transaction will give rise to remuneration for deemed distribution activities in the user’s country even if the company has no physical presence there and irrespective of whether the group is making profits or losses. This approach is contested by other countries because the additional profit is allocated way from countries where the MNE group has actual functions and risks, he said.

Saint-Amans also said that those that advocate using employment as a factor for allocating taxing rights should rethink their plan as this could “backfire.” MNEs can easily move employment to other countries, Saint-Amans observed.

He also noted that the OECD’s unified approach to pillar one excludes extractive industries. This was done to help developing countries so that profits from extractives are not transferred to other countries, Saint-Amans said.

It is important that developing countries stay active in the process, he added. “We need an agreement which is a global agreement because we can’t afford an agreement with 50 countries walking away,” he said.

Next steps

The OECD is currently working with Inclusive Framework member countries on impact assessment. Countries need to understand the effect of the many different pillar one options to perform simulations, refine their data, and figure out where they would stand should the international tax revisions take effect, Saint-Amans said.

Saint-Amans said he hoped that countries will have a better sense of the data and its implications by November and that this information can then be shared with the public by year-end.

The OECD also hopes to release a draft describing most of the elements of the pillar one proposal by January 2020, Saint-Amans said. The goal is to then release more detailed rules. “We expect a solid agreement, hopefully, [in] June,” he said. From there, the implementation phase will begin.

This will not be an easy task. The Inclusive Framework on BEPS steering group has identified over 1,000 technical issues, he said. Some key issues include how to define “customer-facing,” how to determine nexus and if it should be with or without “plus factors”, business line segmentation, and how to find a proxy for sales for digital users.

Countries also say it is important that any new tax nexus created by these rules not trigger other liabilities, like labor law or VAT obligations.