The Organisation for Economic Co-operation and Development (OECD) announced in March that Mathias Cormann will serve as the institution’s next Secretary General. Cormann’s June 1 start date means the first month of his tenure coincides with the final weeks leading up to the OECD/G20 Inclusive Framework’s self-imposed deadline to reach political agreement among nearly 140 governments in ongoing negotiations to address the tax challenges arising from the digitalization of the global economy. The upcoming transition in the OECD’s leadership provides an opportunity to re-examine where the OECD/G20 Inclusive Framework’s efforts stand ahead of the mid-2021 deadline and the many factors influencing those negotiations, including the clear commitment of the U.S. government and the continuing proliferation and expansion of digital services taxes (DSTs) and other unilateral measures.
The first months of the Biden-Harris Administration have prioritized advancement of U.S. engagement in ongoing negotiations at the OECD/G20 Inclusive Framework. Secretary of the Treasury Janet L. Yellen recently sent a letter to her G20 colleagues underscoring the United States’ “[commitment] to the multilateral discussions on both pillars.” The administration also named Itai Grinberg – a seasoned expert in international tax policy with prior multilateral negotiating experience at the U.S. Department of the Treasury – to lead U.S. engagement as Deputy Assistant Secretary for Multilateral Tax. At the same time, U.S. support for the negotiations and opposition of unilateral DSTs continue to enjoy broad bipartisan congressional consensus. Secretary Yellen’s participation in the February 26 meeting of G20 Finance Ministers and Central Bank Governors yielded a renewed commitment to realizing “a global and consensus-based solution by mid-2021.” During this meeting, Secretary Yellen also announced that the United States would be withdrawing its safe harbor proposal for Pillar One. While this move was applauded by certain participating governments as breaking an impasse, governments still must address several significant political questions and technical considerations.
ITI and many other stakeholders notified the OECD about these outstanding issues through public consultations in December 2020 and January 2021. ITI’s submission highlighted that an effective and lasting international agreement must be rooted in sound principles and eliminate double counting. Specifically, an agreement must avoid ring-fencing the digital economy to reflect that the entire economy is digitalizing. We appreciated the amount of work the OECD/G20 Inclusive Framework has clearly put forth in developing mechanisms to provide certainty; after all, one of the key goals of the project is to achieve certainty for businesses engaging in markets around the world so that they can continue to grow, innovate, and contribute to society. In addition to outstanding political questions around key issues like tax rates and thresholds for both Pillars One and Two and the question of co-existence for the U.S. global intangible low-taxed income (GILTI) regime with Pillar Two, tax administrations, industry, and civil society voices alike have also reiterated the need for greater simplification.
Given the remaining issues in play, advancing towards political agreement in time for review and validation by G20 Finance Ministers during their July 9-10 meeting requires a full embracing of multilateralism. This entails refraining from advancing unilateral measures that actively undermine the pursuit of a sustainable multilateral solution, especially now at such a crucial moment in the negotiations. In addition to further complicating negotiations, unilateral tax measures contribute to greater fragmentation of the international tax system through the contravention of international tax and trade norms by charging a tax on gross revenue, targeting nonresident companies, operating outside of tax treaties, and attempting to isolate the digital economy. Unfortunately, despite the breakneck pace of negotiators’ work to address outstanding issues, and the recurring commitment of all participating governments to withdraw existing unilateral measures in favor of a multilateral solution, we have seen the continued proliferation of varied and increasingly expansive unilateral taxes.
As of the first few months of 2021, the European Commission is developing (with reiterated support from the European Council) a digital levy, India has proposed further expansion of an Equalisation Levy that exclusively taxes non-resident companies both large and small selling goods and services online, and Vietnam has released a set of proposals that would create “deemed” permanent establishment criteria unique to non-resident companies engaged in e-commerce activities. Even more governments are actively collecting their DSTs, including France and Turkey. The harmful fragmentation caused by the growing adoption of such measures extends globally and bears implications for all companies doing business across borders. The pursuit of unilateral measures at home undermines the Inclusive Framework’s efforts and, as several European Finance Ministers noted, is fundamentally incompatible with outward public commitment to OECD negotiations and a multilateral, consensus-based solution. Rather than adopting or expanding DSTs to satisfy short-term political prerogatives, governments should be doubling down on their efforts to engage multilaterally and craft a lasting solution.
Cormann is taking the helm of the OECD at an exciting time: the months ahead will build on the culmination of years of work by the OECD/G20 Inclusive Framework to update the international tax system for the 21st century. These negotiations are the best opportunity to address the tax challenges of the digitalizing global economy through a stable, multilateral, and consensus-based solution. Notwithstanding the remaining questions and challenges (and bearing in mind the current system has largely been in place since the establishment of the League of Nations), participating governments have made an immense amount of progress. A political agreement this summer should pave the way for the remaining technical work and lead to the withdrawal of unilateral measures and any further fragmentation of our global tax system. ITI strongly encourages governments to respect their commitments to the multilateral project and refrain from the proposal, adoption, or expansion of unilateral measures. Reaching political agreement on the future of the international tax system depends on it.