The OECD is working on a “novel” approach to preventing multicountry conflicts when a new taxation plan gives more nations a piece of global companies’ profits.
Mechanisms for dispute prevention could be key to reaching international consensus on the plan, organization officials said.
The Organization for Economic Cooperation and Development is trying to get nearly 140 countries to agree to an overhaul of how the digital economy is taxed. The effort seeks to address concerns that multinationals, particularly tech giants, aren’t paying enough tax in the countries where they have users or consumers.
Dispute resolution—including mechanisms such as arbitration that are designed to protect companies from lengthy disagreements with tax authorities—has emerged as one of the most contentious issues in the global tax framework negotiations. Companies and many countries say it’s critical that the rules contain processes for preventing and quickly resolving any disputes arising from a dramatic change to traditional tax rules.
With dispute resolution creating rifts between countries, the project is also considering ways to head off disputes before they start.
The 137 countries involved in the negotiations proposed exploring the idea of “representative panels” made up of tax administrators to determine how much tax companies would pay under one section of the rules, according to a Jan. 31 statement. The panels would help provide certainty under part of the OECD plan known as Amount A under Pillar One—the most stark departure from current tax norms, which would reallocate some multinationals’ profits.
Amount A “could be a poster child for improving dispute prevention,” said Pascal Saint-Amans, director of the OECD’s Center for Tax Policy and Administration. The OECD is still looking for ways to build in a dispute resolution mechanism, he added in prerecorded remarks at a Tax Council Policy Institute conference Friday.
‘A New and Novel Idea’
The OECD’s proposed panels could help give companies certainty about their tax outcome under Amount A, and help them avoid being caught in fights with or between multiple tax authorities over how much of their profits are being reallocated.
The Amount A panels are “a new and novel idea,” said Grace Perez-Navarro, deputy director of the OECD’s Center for Tax Policy and Administration.
“If each country is auditing it separately, you may end up with a lot of different determinations on Amount A. What we want with Amount A is certainty,” Perez-Navarro said during a panel at the TCPI event.
Divided Over Dispute Resolution
The proposed dispute prevention panels could help the OECD head off complicated multilateral arguments, but countries remain divided over how such disagreements should be solved.
Countries that are home to large corporate headquarters, or are net exporters, could lose revenue under the plan as corporate profits are shifted to countries with large consumer markets. In return, revenue-losing countries are looking for increased tax certainty in the form of dispute prevention and resolution—a guarantee that their companies won’t be caught in long audits or subject to unilateral measures like a digital services tax.
Tax certainty is also high on the wish list of companies that worry the new rules could embroil them in more disputes with tax authorities. But developing countries oppose binding arbitration processes, which they say disadvantage them and threaten their sovereignty.
“A number of countries still seem to be reluctant to any form of mandatory binding dispute resolution,” Saint-Amans said. “And it’s part of the deal. The deal is about reallocating taxing rights to markets in exchange for more tax certainty, so one will not go without the other.”
Countries identified the disagreement over binding dispute resolution as a potential roadblock, but agreed to work on options to solve it, he added.
“Is there hope? Yes,” Saint-Amans said.
Trade-Offs for Certainty
Tax certainty is a key issue for U.S. businesses—and by extension, U.S. policy makers—as negotiations continue, Capitol Hill staffers said at the event.
Amount A is “going to be potentially heavy on the backs of U.S. businesses,” said Mark Warren, chief tax counsel for Senate Finance Committee Chairman Chuck Grassley (R-Iowa). “And then how much of a trade-off, how much willingness is there for the certainty, and how much certainty really is there? That’s what we’re trying to assess with a moving landscape.”
Germany—which would likely lose some tax revenue under Pillar One’s profit reallocation, and gain under the plan’s second pillar, a global minimum tax—also sees the certainty as part of the trade-off within the OECD deal, said Sandy Radmanesh, tax attache at the German embassy in Washington.
“Amount A is definitely in focus as we realize that there needs to be a trade-off,” she said, speaking on the same panel as Perez-Navarro. “We need to reallocate some taxing rights in order to get certainty.”