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Daily Tax Report: International

Digital Tax Talks Face Calls for Simplification, More Certainty

Jan. 13, 2021, 9:46 AM

The OECD is facing pressure to make its digital tax plan less complex and create more certainty for multinationals as governments race to find an agreement by a mid-2021 deadline.

Companies and business groups have raised concerns that the last version of an OECD plan to overhaul how the digital economy is taxed could create new compliance headaches and lead to more disputes with tax authorities. The OECD is holding a public consultation on the plan Thursday and Friday.

The Organization for Economic Cooperation and Development is leading an effort to get 137 countries to agree to a plan that addresses concerns that some multinationals—especially U.S. tech giants—aren’t paying taxes in countries where they have users or consumers. The two-prong plan would reallocate profits and set a minimum global tax rate.

“There’s so many problems, so many difficult issues,” said Jeff VanderWolk, a partner at Squire Patton Boggs in Washington. The OECD “will have to go back to the drawing board” and find solutions that countries can agree to.”

Governments will then meet Jan. 27-28 to discuss feedback. They’re aiming for a global agreement by this summer, but consensus has been elusive so far. Negotiators missed deadlines for agreement in 2020 due to the pandemic and political rifts.

For countries to agree on anything they’ll need to simplify aspects of the plan that are too complicated, said Sandy Bhogal, a partner at Gibson, Dunn & Crutcher in London.

Simplification

One of the most contentious elements has been Pillar One’s “Amount A,” which would give more revenue to countries where multinationals have customers or users, but little or no physical presence. Negotiators still must agree on which businesses and activities the rules will affect—with the current plan proposing to target highly profitable “consumer-facing businesses” and “automated digital services.”

Under current definitions, some companies will have business lines both in and out of the rules. Requiring them to segment their business lines to figure out what falls under Amount A will be challenging, especially if it doesn’t match how companies are currently organized.

“It becomes a real problem for companies to try to determine how to comply,” said Cathy Schultz, vice president of tax policy at the National Foreign Trade Council. “We really think companies shouldn’t have to segment separately from how they already organize their own businesses.”

Companies are also warning problems with segmentation under the current plan.

Segmentation “should be required only in limited cases where necessary to accomplish the objectives of Amount A,” Microsoft Corp. wrote in its Dec. 14 letter.

Microsoft declined to comment further.

Companies are also raising concerns about possible double taxation under Amount A, if Pillar One applies to revenue already taxed domestically. The blueprints proposed two double taxation relief methods: Exempting income affected by Amount A for tax purposes, or offering taxpayers credits to offset taxes elsewhere.

Dispute Resolution

Companies also worry that Pillar One’s new rules will cause years-long fights with tax authorities.

In an October blueprint of Pillar One, the OECD pitched a plan for a system of dispute prevention panels, which will also be discussed on Thursday, according to an agenda of the meeting. Some said the plan needs more work.

“We do not believe that the dispute resolution mechanism is yet fit for purpose,” Etsy Inc. wrote in a comment letter. Without a guarantee of binding arbitration, companies would be “in no different a position than if the Blueprint was silent upon dispute resolution,” the letter said. Etsy didn’t respond to a request for additional comment.

“Dispute resolution is going to be absolutely key and that’s going to take a lot of work,” Bhogal said. “Not least because the proposed Pillar One mechanic asks a lot of tax administrations in taking on a new set of rules,” Bhogal added.

But the issue is politically fraught. While companies favor dispute resolution with binding outcomes, not all countries agree. Developing countries, in particular, have opposed binding arbitration.

The G-24 group of developing countries, which includes Argentina, Brazil, India, and Nigeria, “supports focus on dispute prevention rather than on dispute resolution,” and is seeking an alternative to arbitration, the group said in a comment letter.

GILTI Concerns

For U.S. companies, the biggest concern is whether existing U.S. global minimum tax rules known as GILTI will exempt them from at least some of Pillar Two, the OECD’s global minimum tax plan, VanderWolk said.

Multinationals are also raising concerns about complexity in Pillar Two, the global minimum tax—including the challenge of calculating their effective tax rate in every jurisdiction where they operate.

“The way the proposals have developed have raised a lot of questions about how they will interact with existing rules and how it will be administered or complied with,” said Daniel Bunn, vice president of global projects at the Tax Foundation in Washington.

The OECD suggested simplification options to reduce the number of countries or years for which a multinational would need to calculate its effective tax rate.

Companies welcomed the move towards finding simplifications.

“The form of the Pillar Two system currently outlined has the potential to be incredibly complex,” Amazon.com Inc. wrote in its Dec. 14 letter, “but we think there is a path forward to a workable solution that is not unreasonably complex and will meet the broad policy aims.” Amazon didn’t return a request for additional comment.

To contact the reporters on this story: Isabel Gottlieb in Washington at igottlieb@bloombergtax.com; Hamza Ali in London at hali@bloombergtax.com

To contact the editors responsible for this story: Meg Shreve at mshreve@bloombergtax.com; Yuri Nagano at ynagano@bloombergtax.com

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