A senior Treasury official laid out elements of a new global tax plan—catalyzed by the 2017 U.S. tax overhaul—that could forestall the Europe-U.S. standoff over the European digital tax proposal multinationals dread.
The EU finance ministers are meeting Dec. 4 on the tax, and may vote to postpone any action until the Organization for Economic Cooperation and Development finds a digital tax solution all its members can agree on.
Meanwhile, the Task Force on the Digital Economy, the OECD group mandated by the G20 to find a digital tax solution, is working on alternatives to the EU plan when it meets Dec. 4 and 5, said Lafayette G. “Chip” Harter, deputy assistant secretary for international tax affairs at the Treasury Department.
Harter made his remarks Dec. 3 in Washington at a conference co-sponsored by Georgetown University Law Center.
Those proposals, which borrow from the new U.S. laws for international businesses, would crack down on multinationals’ aggressive tax planning and ability to get very low effective global tax rates by shifting profits to low-tax jurisdictions. Unlike the EU digital tax, these ideas could find support from the U.S.
The proposals would likely find some favor with multinational companies, which would embrace a global regime that applied a coherent policy across all jurisdictions, rather than a patchwork of unilateral measures. The proposals also present an alternative to the EU approach that specifically targets some of the largest multinational tech companies, often U.S.-based. These proposals could affect all multinationals, particularly those with high-value intangible assets like intellectual property.
The stakes are high. “If the OECD were to fail in this effort, we’d almost certainly see an acceleration in the breakdown of consensus and a proliferation of unilateral measures adopted by countries around the world,” Harter said.
Minimum Tax, BEPS
Harter said the OECD group is working on a plan that could include the following:
- A global minimum tax on a multinational company’s controlled foreign corporations, similar to the U.S. “global intangible low taxed income” regime. Unlike GILTI, the OECD version would probably apply on a per-country rather than global income basis, Harter said. “It appears that U.S. tax reform in this respect may be catalytic,” he said. The proposal is being sponsored at the OECD by Germany in collaboration with France, Harter said.
- Accompanying “defensive measures” to prevent base erosion—somewhat similar to the U.S. base erosion anti abuse (“BEAT”) tax. These measures would apply when a company in the market jurisdiction made deductible payments to an offshore entity that wasn’t subject to the minimum tax regime, Harter said. It would prevent a company from lowering its taxable income in the higher tax jurisdiction through those payments.
- The U.S. has also floated a proposal at the OECD that would allow market jurisdictions to tax returns on local marketing intangibles used within that jurisdiction, even if the investment in those intangibles was made from offshore. “We think that example is conceptually pretty close to what we also see in the digital space,” Harter said.