The main headline on the front page of a recent edition of the Financial Times was stark: Global economy set for sharpest reversal since Great Depression. Inside the same edition was a thoughtful piece about the virus in India by the novelist Arundhati Roy. At the end of the article she observed: “Historically, pandemics have forced humans to break with the past and imagine their world anew.This one is no different.It is a portal, a gateway between one world and the next.” The implications of the pandemic and associated economic events are staggering, and the changes those might bring could be vast.
Things unimaginable a month or two ago now seem normal; and things that seemed normal a month or two ago, already seem hard to recall. We can begin to discern how some things might change: our views on healthcare preparedness; the adequacy of the social safety net among countries; the lack of resilience in extended supply chains; the benefits of “redundancy.” While much is unclear, and what is on the other side of Roy’s “portal” is still unknown, there are questions we can ask that, as events continue to unfold, might help us discern a little more clearly what the future may hold (albeit with great care and considerable humility). And that is as true in our specialized world of tax as anywhere else. So the question I want to ask is what becomes of tax multilateralism?
By way of background, recall that for the last four decades, even following the global financial crisis (GFC) that started in the U.S. in 2007-2008, corporate tax rates have declined. BEPS (Base Erosion and Profit Shifting) was a reaction to the GFC, as well as to globalization and digitalization. BEPS’ impact on business was considerable. Perhaps in contrast to recent events, BEPS was, above all, a multilateral endeavor—in fact it extended the bounds of multilateralism well beyond what many would have considered possible. While BEPS was driven by a powerful anti-avoidance narrative, neither the narrative nor its outcome really dented the accepted belief (the “paradigm” if you will), that tax rules should not be a barrier to international trade and investment.
Will we have the same multilateral tax paradigm on the other side of the “portal”? To explore that I want to briefly look at three Covid-19 related events from the past few weeks: (1) the CARES Act in the U.S.; (2) the surprise (and substantial) extension of the equalization levy in India, as well as similar measures in Indonesia; and (3) calls for a postponement/pause of the Organization for Economic Cooperation and Development (OECD) digitalization project.
CARES Act
The cost of Public Law 116-136 (CARES Act) is roughly 10% of U.S. gross domestic product (GDP), and further plans, plus announced Federal Reserve facilities, could increase that to 30%. Other countries are spending (per capita) similar amounts. Clearly, governments will eventually have to raise substantial amounts of revenue to service and contain debt burdens (even at low interest rates). More fiscal measures may be needed to stabilize economies and/or to promote growth after the pandemic recedes. It seems inevitable that additional (perhaps, new) taxes will play some part in this.
But who will pay the additional taxes? How will the revenue be raised? The money has been spent by nation states. As a result, it will be politically attractive at a time where national borders (literally and figuratively) are making a comeback to tax “the other” (foreigners), particularly if they are deemed to have come through this crisis successfully (some businesses). This may lead in a nationalistic (or unilateral) direction, rather than a multilateral one.
Equalization Levy and Electronic Transactions Tax
The scope of the Indian equalization levy was greatly extended by a late amendment to the Indian Finance Act which came into effect almost immediately. This extends the levy on gross payments to non-Indian vendors beyond just digital advertising to all e-commerce operators who provide “e-commerce supply or services” to India. Likewise, the Indonesian government, using emergency powers legislation, brought in a new element of income tax to tax a wide range of digital transactions by deeming a permanent establishment under a significant economic presence test (which becomes something likely more akin to a gross revenue tax in certain scenarios), again coming into effect almost immediately.
These are, by definition unilateral rather than multilateral actions, and, more worryingly, come from two large G20 countries that even weeks ago were talking about the importance of multilateral agreement at the OECD. Neither country has mentioned the possibility of repealing these measures once multilateral agreement is reached at the OECD. Both have cited Covid-19 as the reason why they had to act now. Both are aimed squarely at foreign businesses. If—or as—the crisis worsens (increasing the need for government support in many countries) these will likely not be the last of such taxes enacted.
Political Bandwidth and the OECD Project
The work of the OECD (and participating governments) on both BEPS and now the Digitalization project has been buoyed by political momentum, which has resolved technical issues and significant political issues as well. The political issues have included the need for “tax sovereignty” to give way in some measure to achieve multilateral agreement. The Digitalization project has, in a sense, required more political support than BEPS because the reallocation of revenue from one country to another that is the subject of Pillar 1 and the competing alternatives for a minimum tax that is the subject of Pillar 2 will both directly affect the tax revenues of countries.
As recently as the end of February, the finance ministers of several major countries meeting in Riyadh reaffirmed their political commitment to the digitalization project. Short weeks later, however, they are having to engage 24/7 in saving their countries’ economies due to the pandemic. The inability to focus on such issues as a mandatory Pillar 1 vs. a safe harbor is obvious and understandable. What is less clear is whether these crises will lessen governments’ commitment to multilateral solutions, particularly if those involve the reallocation of tax base.
These recent developments carry the potential of a less multilateral world, particularly when added to rising threats to cross-border trade from impositions of tariffs. So, how might that manifest itself? Here are a couple of possibilities:
1. In relation to Pillar 1 of the digitalization project, agreement on Amount A may well become harder. It was never going to be easy for a politician to explain ceding tax base to other countries, but in an era of rising revenue needs, it will be more challenging for the ceding governments to agree to a plan with that effect.
2. In relation to Pillar 2, “base protection”—whether that be taxing foreigners or taxing residents on foreign income—will become more attractive. That may lead to a greater focus on denying deductions, imposing withholding, or a reworking of the minimum tax that allocates amounts among a range of “payor” countries.
3. More generally, higher taxes—including new tax bases—seem likely.
4. Issues regarding “tax competition”—both at a country level, and at a regional level—may acquire a new intensity.
5. Measures outside current tax treaties (equalization levies, diverted profits taxes, multinational anti-avoidance laws, etc.) will likely grow in popularity, because they avoid tricky issues over dispute resolution, and also because they allow other issues such as permanent establishment nexus to be sidestepped.
6. Finally, it is possible that the focus will return—again, as with India and Indonesia—to digital businesses, but very broadly defined.
Do these possibilities mean that tax multilateralism is dead? I certainly hope not. It is quite possible that the last decade’s multilateral engagement will lessen, or even prevent, some of the possibilities mentioned above. It is to be hoped that multilateral engagement will continue, temper the worst unilateral developments, and lead to a restoration of multilateral steps that undo harmful unilateral measures, and help restore the global economy with its promise of broadly shared prosperity. Even if multilateralism were to be limited, there would be considerable benefit to coordinating the introduction of new measures, so that overlaps, potential disputes, and unnecessary compliance burdens would be minimized.
Multilateralism is still worth striving for, but if we are to achieve that multilateralism on the other side of the portal, businesses, governments and international organizations alike will have to realize how different life there will be. As Lampedusa put it in The Leopard: “If we want things to stay as they are, things will have to change.” If we want tax multilateralism to survive, it will likely have to develop in new ways, with new forms of interaction and partnership – and for that to happen all of us, right now, need to start talking about that and how it might work, even as we are walking through that portal.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Author Information
Will Morris is PwC’s Deputy Global Tax Policy Leader and Chair of the Taxation and Fiscal Committee of Business at OECD (BIAC).However, the views expressed in this article are personal, and do not necessarily represent the views of either PwC or Business at OECD.