This is a roundup of Bloomberg Tax’s coverage from the Organization for Economic Cooperation and Development’s public consultation on Pillar One, the first part of its plan to rewrite global tax rules. Isabel Gottlieb was in Paris to bring you details on the concerns dozens of companies and business groups raised during the Nov. 21-22 event.
The message from the OECD’s two-day public meeting on Pillar One was clear. Companies and industry groups may agree it’s time international tax systems catch up to the digital economy, but they don’t agree on how.
The OECD is trying to get more than 130 countries to agree to a plan by the end of 2020, but at the same time the effort is facing concerns from multinational companies that it will complicate their tax affairs. Many companies don’t want the new rules to apply to them. Other critics say the overhaul may not go far enough to bring about real change.
The stakes are high. A growing number of countries—frustrated with the rate of progress at the OECD and concerned that tech giants like Alphabet Inc.'s Google and Facebook Inc. aren’t paying enough tax where they have big customer bases—are introducing unilateral revenue taxes on digital companies.
“Without broad and deep international consensus, chaos is the almost inevitable outcome of where we are now,” said Will Morris, deputy global tax policy leader at PwC and chair of the tax committee at Business at the OECD, an advisory group.
The OECD itself echoed that message. “There’s so many unilateral measures coming forward that if we don’t work quickly, those will take over the landscape and it will be very difficult to pull all of that back,” said Grace Perez-Navarro, deputy director at the organization’s Center for Tax Policy and Administration.
Here are the three big takeaways:
Asking for Exceptions
The focus of the two-day event was on the OECD’s plan to reallocate profits. It would affect just a portion of some multinationals’ profits—targeting only the most highly profitable large companies, and only sales from “consumer-facing businesses” that either sell to or interact directly with users or consumers.
A number of industries are seeking carve-outs from those rules, while others argue the definition shouldn’t apply to them at all.
For example, Roger Kaiser, a representative of the the International Banking Federation, said banks should fall outside the scope of the new rules. Institutional and investment banks are business-to-business models, and retail banks don’t meet the high profitability thresholds and don’t sell into jurisdictions remotely, he said.
But companies also disagreed about whether there should be carve-outs at all.
Exceptions for certain industries or types of businesses could ultimately lead to “ring-fencing,” or targeting, the digital sector, Giammarco Cottani, director of global tax policy at Netflix Inc., said.
There was also a push for simplification. Companies are concerned the complexity of the rules could make it much harder for them to administer their own tax affairs, and increase the chances tax authorities will launch new audits.
Several companies floated the idea of a “one-stop shop”: A centralized approach that would give responsibility to a multinational’s parent entity and home country for calculating, collecting, and remitting taxes owed to other jurisdictions under the new plan.
Tax officials from Johnson & Johnson and Procter & Gamble Co. also both voiced support for a formulaic approach to calculating how multinationals should price intercompany transfers for marketing and distribution functions. Such an approach would be simpler than current, more subjective rules, which could help cut the risk of disputes with tax authorities, they said.
The hunt for more revenue is one of the biggest drivers for countries backing a global revamp. But it’s not clear how much money the proposed plan to reallocate taxing rights will generate for the “market” countries that hope to receive more. The OECD is still working on an impact analysis of how much revenue countries would gain or lose under the plan.
“Regrettably, we believe the unified approach in the current form is unlikely to deliver an outcome that is a substantial improvement over the current framework,” said Tommaso Faccio, head of secretariat at the Independent Commission for the Reform of International Corporate Taxation, a coalition that includes tax advocacy organizations and economists.
“What could be a comprehensive reform has been narrowed down to apply to consumer-facing businesses,” and there’s a lot of pressure to include carve-outs for certain industries, he added. “We worry that this modest increase is unlikely to justify the political investment in the process, increasing complexity and administrative problems that multinationals and authorities will face.”
A Nov. 19 report from the French Council of Economic Analysis, a government advisory group, said the plan would increase complexity with only a negligible impact on tax revenues worldwide.
“Keep in mind the trade-off between complexity and tax impact,” said Janine Juggins, executive vice president and head of global tax and treasury at Unilever PLC.
Juggins said the company was fully behind the work—but cautioned the OECD to be sure the revenue impact was worth the trouble. She pointed to “amount A” of the proposal, which would shift a portion of large multinationals’ above-normal profits to the market jurisdictions where they have users or consumers.
“We should avoid creating complexity where there is no tax impact, not just because of the administrative burden for taxpayers and tax authorities, but because political success will depend on international tax changes being well understood by voters,” Juggins added. “It has to be simple and it has to have impact.”
The OECD signaled it was open to some of the issues raised, including taking a look at the “one-stop shop approach” and defining what “consumer-facing businesses” would be taxed under the plan, Perez-Navarro said. And it will consider how to determine which lines of a company’s business would be subject to the new rules, she said.
Perez-Navarro also committed to designing a new dispute resolution mechanism to deal with mandatory binding arbitration. It’s a key sticking point for developing countries. Companies want a guarantee that tax authorities will settle disputes within a set amount of time under the OECD’s plan. But developing countries are worried that will they be forced into a type of dispute resolution that will infringe on their sovereignty, said Thulani Shongwe, an economist in the secretariat of the African Tax Administration Forum.
The Inclusive Framework—the 135 jurisdictions that will ultimately agree to or veto the plan—will meet in January to discuss what they will take from the latest proposal, said Pascal Saint-Amans, director of the OECD’s Center for Tax Policy and Administration. The framework “may reshape, more or less dramatically, what the Secretariat puts on the table,” he added. They will meet again in June or July, he said.
The OECD will hold a public consultation on the second part of its plan Dec. 9, focusing on a global minimum tax and rules to ensure that companies pay a minimum rate somewhere, even if they operate in low-tax jurisdictions.