A global plan to rewrite how the digital economy is taxed could create new conflicts between countries hoping for a bigger bite of multinationals’ profits.
The Organization for Economic Cooperation and Development is working on a plan to allocate more corporate profits to countries where multinationals have a large market presence but little or no taxable presence. That means some countries would see more tax revenue under the plan while others would see less.
If multiple countries disagree about how much each should get, things could get messy. Some practitioners say an external body to resolve those disputes may be the answer.
Implementing the OECD plan would require creating a body “that can arbitrate on a multilateral basis because the reallocation of some profits to market countries will most probably affect all countries,” said Mary Bennett, a partner at Baker & McKenzie LLP’s Tax Practice Group and former deputy international tax counsel at the Treasury Department.
“I don’t see how we can avoid it,” she said, speaking Sept. 9 at the International Fiscal Association conference in London.
The OECD plans to present an update on its digital tax project to the Group of 20 finance ministers in mid-October in Washington.
Improving Dispute Resolution
The OECD isn’t working on a “global tax body,” Pascal Saint-Amans, director of the OECD’s Center for Tax Policy and Administration, told Bloomberg Tax Sept. 10. “However, I happily confirm we are working on improving dispute resolutions as part of a multilateral solution,” he added.
The organization is the most likely place to look to for an approach to handling disputes, said Brian Jenn, former deputy international tax counsel at the Treasury Department.
“There could be some sort of mechanism, likely facilitated by the OECD, to have a coordinated approach to resolving disputes,” he said, since any dispute is likely to affect a number of jurisdictions. Jenn is now a partner in McDermott Will & Emery LLP’s tax practice.
“I think it’s clear that bilateral mechanisms for dispute resolution are not going to be adequate for anything that’s being contemplated” as part of the OECD’s plan to reallocate profits. he said.
Under current transfer pricing rules—which determine how much profit a multinational company allocates to its entities—disputes are usually between two countries, said Carol Doran Klein, vice president and international tax counsel at the U.S. Council for International Business.
“In the brave new world, most adjustments would be multilateral, and therefore bilateral dispute resolution would be inadequate,” she said. “If you are going to have some global profit split, then having a uniform definition of the profit and application of the splitting factors would probably be required, and having one body making determinations that bound all the affected countries would make some sense.”
Glyn Fullelove, deputy president of the U.K.'s Chartered Institute of Taxation, said a global body would be needed to help with conflicts where multinational companies are concerned. “If governments decide to apportion residual profits to market countries, then it will make it very necessary to create such an organization. This is because disputes will be inevitable and by their very nature, these disputes will be multilateral,” he said.
Bennett said getting countries to sign on to a global mechanism for resolving disputes would be a challenge. “There would have to be a tremendous willingness to hand over a lot sovereignty over tax issues that are typically dealt with on a country-to-country basis,” Bennett said.
Jenn also said countries could be hesitant. “You will certainly run up against sovereignty concerns the more you go in the direction of something like a WTO for tax, and I don’t think, I think there are a lot of countries who would be reluctant to submit dispute resolution to a body like that.”
Peter Barnes, a tax partner at Caplin & Drysdale and a professor at Duke University, said “a more realistic way” to administer the OECD solution would be to use regional organizations for tax disputes, such as the European Union or smaller multilateral organizations.
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(Updates with comments from Saint-Amans in seventh paragraph.)