What's to Come in the Future of the Global Tax System

The Organisation for Economic Co-operation and Development (OECD) announced in October 2020 a revised goal of mid-2021 for reaching political agreement in negotiations to address tax challenges arising from the digitalization of the global economy. Coupled with outcomes from the first Base Erosion and Profit Shifting (BEPS) negotiations, which countries are continuing to implement and strengthen, the current negotiations represent arguably the most significant update to the international tax system since the League of Nations. Despite the scope of the project, its politically sensitive nature and the extraordinary challenges posed by the COVID-19 pandemic, negotiators have nonetheless demonstrated significant progress by releasing more than 500 pages of technical work that is now the subject of public consultations. Of course, this is not to say that there are not outstanding questions – there are. But the progress made in the past few months reinforces that the OECD process is working and gives all the more reason for governments to continue directing their energy toward reaching a lasting agreement.

Why an International Agreement Matters

As we pass this latest milestone, it’s worth reexamining why an international solution to these issues is so important. For one, negotiators are examining an international tax framework established decades prior to the advent of the internet and digital trade. A legitimate case has been made for the update of certain elements. The increasing movement of commerce online has sparked stronger interest in genuine discussions about making sure the international tax system is fit for the 21st century. While this system has traditionally based taxation on where companies have a physical presence, digitalization has allowed value creation and engagement of users far beyond that physical presence. This has led to discussions about whether the longstanding norms that underpin the international tax system should be updated to better reflect today’s economy. And because these rules have to do with how all governments tax companies operating across borders and jurisdictions, only a consensus-based international approach can ensure the consistency necessary for companies, regardless of sector, to continue to predictably do business in the global economy.

Progress to Date in the OECD’s Project

Nearly 140 countries are now participating in the OECD’s work through the Inclusive Framework, which has produced a Unified Approach with two pillars: Pillar One, which is intended among other things to address questions around digitalization, is about the allocation of new taxing rights to market jurisdictions for certain companies’ activities; and Pillar Two acts as a global minimum tax on corporate profits for certain companies. While the OECD initially hoped to reach political consensus this year, the ongoing economic and societal challenges caused by the COVID-19 pandemic as well as outstanding questions have caused the OECD to officially move its goal for political agreement to mid-2021.

Alongside the announcement to postpone the timeline for reaching political agreement, the OECD released several work products and launched public consultations so that stakeholders could provide their feedback on the OECD’s technical work to date. These documents – which include blueprints for Pillar One and Pillar Two as well as an economic impact assessment – underscore how the OECD and the Inclusive Framework have decisively moved forward a tremendous amount of work in unprecedented fashion. The blueprints for Pillar One and Pillar Two come in at well over 200 pages each, and make clear that immense progress has been made on the processes, mechanisms, and other features that are vital to the realization of a functioning international tax system. Making sure that all technical features are fully thought through – and that there are opportunities for meaningful stakeholder feedback – is critical to ensuring that an agreement delivers lasting reforms and certainty for taxpayers and tax administrations alike.

There is also, of course, a counterfactual to an OECD-developed solution. In this scenario, companies across sectors face double or multiple taxation on the same income, increased uncertainty and disputes, and potential retaliatory tax and trade actions. This is particularly the case as economies outside of Europe introduce increasingly expansive unilateral measures aimed at collecting revenue from the sale of all goods and services online by foreign companies – an outcome that reverberates well beyond the technology sector. The OECD’s own recent analysis anticipates that global GDP could drop by more than 1% under a worst-case scenario that features “a proliferation of uncoordinated and unilateral tax measures…and an increase in damaging tax and trade disputes.” Progress in multilateral negotiations to date shows that, given pragmatism and political will, such an outcome can and should be avoided.

The Impact of Digital Services Taxes

Despite significant progress taking place at the OECD, the proliferation of unilateral digital services taxes (DSTs) continues. In recent weeks, Spain has formally adopted a DST, a new DST was proposed in Slovenia, and the African Tax Administration Forum (ATAF) released a suggested approach for DST legislation that encourages governments to preempt the OECD’s project with national measures. These unilateral DSTs represent one of the most significant challenges to ultimately securing a sustainable international agreement through the OECD. Beyond further fragmentation of the international tax policy landscape, individual country measures have raised significant trade implications, most notably on U.S.-headquartered companies. The Office of the U.S. Trade Representative (USTR) is actively investigating ten jurisdictions under Section 301 to determine whether the relevant DSTs disproportionately impact U.S. companies; these investigations come on the heels of USTR’s 2019 report that found France’s DST to “deliberately target U.S. companies.”

While France and the United States reached a détente to postpone the collection of DST payments and refrain from the application of tariffs, France has reiterated its intent to collect DST payments in mid-December 2020 even though the Inclusive Framework and G20 Finance Ministers have committed to the new deadline. This can only escalate commercial tensions and augment the probability of a trade policy response. Instead, ITI continues to encourage governments to withdraw or refrain from the introduction of unilateral tax measures, and to re-commit to the ongoing negotiations at the OECD.

U.S. Engagement at the OECD

The United States has remained consistently engaged in the OECD’s international tax work over the years, starting with the Obama Administration when the BEPS project first began in 2013 and continuing with the OECD’s current project over the last several years. In fact, many of the international tax reforms negotiated through the first BEPS project were implemented as part of the U.S. Tax Cuts and Jobs Act (TCJA). While the United States has expressed views on both policy and process-related aspects at different points of the current project, U.S. engagement has continued uninterrupted.

Many countries have made much of the election and the possibility of a different approach by a Biden Administration. As noted above, both Democratic and Republican administrations have been engaged constructively in the OECD’s global tax policy efforts in recent years. These efforts have been bolstered by support from Democratic and Republican policymakers in Congress, who have reiterated their desire for multilateral cooperation at the OECD to reach a sustainable solution as well as their concerns that unilateral measures are problematic and undermine the ability to reach that kind of outcome. While it is too soon to speculate on the potential technical positions of the White House in January, we would expect to see continued robust commitment to the multilateral project and continued bipartisan opposition to unilateral measures seen as disproportionately targeting U.S.-headquartered companies.

What Happens Next

The ongoing digitalization of the global economy poses legitimate challenges that need to be addressed. ITI has long supported the OECD’s project for providing a forum to reach a consensus, multilateral solution, including through the release of our first-of-their-kind principles intended to guide negotiators as they navigate political and technical issues. This work remains as critical as ever, and the progress made despite the challenges of 2020 underscores the continued value of governments’ commitment to the ongoing negotiations and the avoidance of go-it-alone solutions to inherently international policy issues. We look forward to participating in the public consultations on behalf of our members and staying closely engaged as the project continues into 2021.

Public Policy Tags: Tax Policy