The U.S. wants companies to have a choice to fully opt in or out of part of the OECD’s plan to overhaul global tax rules, a senior Treasury official said.
The safe harbor proposal, first suggested in a letter from Treasury Secretary Steven Mnuchin, comes while the OECD is trying to get more than 130 countries to agree to a plan to rewrite how the digital economy is taxed. The Organization for Economic Cooperation and Development is trying to address worries that some companies aren’t paying enough in taxes or in the right places.
“From the U.S. point of view, it just would accomplish nothing to agree to some multilateral agreement that is not capable of being implemented” by Congress, said Lafayette “Chip” Harter, deputy assistant secretary for international tax affairs at the Treasury Department.
The U.S. is concerned about the first portion of the OECD’s plan, known as Pillar One. The plan would reallocate a portion of corporate profits to the jurisdictions where companies have users or consumers. It would also simplify the existing rules that determine how much tax multinationals owe, using formulas and rules that differ from existing standards.
Mnuchin highlighted some of those issues in his letter to the OECD, writing that the U.S. has “serious concerns regarding potential mandatory departures from arm’s-length transfer pricing and taxable nexus standards—longstanding pillars of the international tax system upon which U.S. taxpayers rely.”
The Treasury proposal would let a multinational “either elect in to all of Pillar One, on a global basis,” Harter told Bloomberg Tax Dec. 9 at an OECD consultation in Paris. “Or it could choose not to and just fend for itself under current law.”
The approach would give multinationals that opt into the new rules the benefits of “mandatory dispute resolution, administrability of the more formulaic pricing, and get greater tax certainty,” he said.
The Treasury’s proposal has raised questions about how it would work and whether other countries would back it during OECD negotiations, tax practitioners said. The OECD has warned that other countries may not go along with the U.S.'s idea.
“Given that the concern appears to be with Congress’ willingness to implement any changes, it seems probable that the Secretary is setting forth a ‘red line,’” said Brian H. Jenn, a partner at McDermott Will & Emery in Chicago and former deputy international tax counsel at the U.S. Treasury.
If the U.S. is drawing a line it will not cross, more countries could turn to unilateral measures, like digital revenue taxes, in response, Jenn said. He served as co-chair of the OECD’s Task Force on the Digital Economy overseeing negotiations.
The idea of giving companies a choice on following profit reallocation rules—known as “amount A"—under Pillar One is puzzling, said Carol Doran Klein, vice president and international tax counsel at the U.S. Council for International Business. Amount A is designed to give more taxing rights to countries where companies’ consumers are located, instead of where they have headquarters or hold intellectual property.
“The point of amount A was to reallocate taxing rights among jurisdictions, to bring into tax something that wasn’t taxed previously. So how can that be optional? Because then the taxing rights aren’t reallocated,” she said.
Opting into a Pillar One approach could appeal to companies facing high compliance costs from an increasing number of unilateral taxes aimed at the digital revenue of big tech in countries like France, Italy, Austria, and Turkey.
Making Pillar One an election that saves companies from digital services taxes and other unilateral measures could be a solution to the debate about taxing digital companies, “while maintaining some principles around the income reallocation that is proposed to put that debate to rest,” said Itai Grinberg, professor of international tax at Georgetown University Law School.
The elective approach could also help limit the size of the “experiment” in profit reallocation that Pillar One proposes, he added.
“Pillar One would be an experiment no matter what, but under a safe harbor, it would be an experiment only for companies that are electing in,” he added. “Which seems appropriate, at least at the outset.”