The Inclusive Framework on BEPS announced agreement to continue working towards a new long-term solution by 2020 to tax challenges arising from digitalisation. A policy note released after the Jan. 23-24 meeting identified two pillars on which discussions will focus: 1) how existing ‘nexus’ rules could be modified to take into account changes to the economy due to digitalisation, and 2) addressing BEPS concerns through a minimum tax approach.
Proposals under Pillar 1 include rearranging tax rights based on either a fractional apportionment, user contributions or a company’s investment in marketing intangibles.
Proposals under this pillar represent significant possible changes to existing rules such as traditional transfer-pricing rules and the arm’s length principle. Also possible are changes to permanent establishment, including the concept of “significant economic presence”.
The user participation proposal is supported by the UK but opposed by the US because it lacks neutrality across industries, thus ignoring the OECD’s stated agreement with the principle that it is not wise to ringfence the digital economy. It also faces challenges regarding the practicality and complexity of implementation. Fractional apportionment is supported by Colombia, India, other developing jurisdictions, and would potentially benefit punitive tax regimes at the expense of low-tax jurisdictions.
Pillar 2 proposals aim for stronger BEPS protections and include a global minimum tax approach like the US Global Intangible Low Tax Income (GILTI), and a tax on base-eroding payments like the US Base Erosion Anti-Abuse Tax (BEAT). Global anti-base erosion proposals modelled after the US GILTI and BEAT rules are favoured by France and Germany.
On March 13-14, the OECD held a public consultation meeting addressing these possible solutions to the tax challenges of digitalisation. Officials from about 60 countries attended, as well representatives from businesses, labour groups and academics. The OECD was strongly urged to be cautious in seeking sweeping changes to long-standing rules, especially relating to pillar 2 proposals. Many further warned against using BEAT as a model.
The meeting also featured standard OECD canards like the alleged “race to the bottom” on corporate tax. In a telling admission that some saw the intended goal of BEPS is to sustain high corporate tax rates, organised labour groups cited the fact that said “race to the bottom” continues despite the ongoing implementation of BEPS as evidence of the need to support the pillar 2 proposals.
As part of its ongoing implementation of BEPS Action 5, the Inclusive Framework also released Harmful Tax Practices – 2018 Progress Report on Preferential Regimes. The assessment of so-called preferential tax regimes conducted by the Forum on Harmful Tax Practices yielded new conclusions on 57 regimes. Forty-four were regimes where jurisdictions delivered on their commitment to make legislative changes to abolish or amend the regime, render the last of the IP regimes identified in the 2015 Action 5 report as “not harmful.” Three regimes, all from Thailand, were found potentially harmful. However, each has been abolished but due to legal constraints the benefits of the regimes will remain beyond the agreed timelines.
Additional countries continue to fall in line with BEPS. Morocco joined the Inclusive Framework on BEPS as the 129th jurisdiction. Belize became the 86th jurisdiction to join the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, which allows jurisdictions to integrate results from the BEPS Project into their existing networks of bilateral tax treaties.
Monaco, Guernsey, Finland, Georgia, the Netherlands, and Luxembourg also deposited their instruments of ratification for the Multilateral Instrument. And Mauritania joined the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, the key instrument for implementation of the automatic exchange of taxpayer information standard, as the 127th jurisdiction.
In non-BEPS related work, the Global Forum on Transparency and Exchange of Information for Tax Purposes published seven peer review reports for Hong Kong, Liechtenstein, Luxembourg, the Netherlands, North Macedonia, Spain, and the Turks and Caicos Islands, assessing compliance with the exchange of information on request standard. All were rated “largely compliant”.
The Forum on Tax Administration, featuring 53 global tax administrations, met in Chile on March 26-28. Following the Plenary meeting, the Forum announced agreement to ramp up work on tax certainty including through some members participating in the International Compliance Assurance Programme, support development of new standardised reporting requirements to facilitate international exchange of information on those selling goods and services through the sharing and gig economy, establish a digital vision for Tax Administration 2030, and pursue “effective use of the vast amount of information on offshore accounts currently being exchanged under the OECD/G20 Common Reporting Standard”.
Finally, economic surveys were released for Denmark, Hungary and Australia. The report for Denmark finds high living standards and wellbeing, but it warns of substantial downside risks if trade tensions continue to escalate and suggests reducing top marginal tax rates on labour and capital income. Hungary showed strong economic growth in 2018 with historically low unemployment, but it is also vulnerable to escalation international trade disputes and faces long-run demographic challenges from an aging population. Australia’s economy was noted for its resilience with 3% growth projected in the near future, but its housing market was identified as a source of vulnerability.
Overall, recent developments continue to highlight that digitalisation will remain at the fore of the OECD’s agenda going forward. Moreover, the issue appears to be providing the excuse for tax collectors from high-tax regimes to finally impose some long-held fiscal fantasies, such as formulary apportionment and global minimum taxes. How will jurisdictions react if digitalisation becomes the catalyst for yet another moving of the goalposts by the OECD?