OECD Moves Deadline for Global Tax Decision to 2021
The OECD headquarters in Paris
By Rick Minor
Earlier this month, the OECD released its package of two detailed tax proposals or “blueprints” for a global solution to
(1) tax the revenue from digital business models more equitably (pillar 1) and
(2) introduce a global minimum tax to discourage the use of tax rate competition to attract foreign investment (pillar 2).
If adapted together, the OECD estimates that in the aggregate it would reallocate $100 billion in tax revenue to consumer or market jurisdictions and generate an additional $US 100 billion in tax revenue globally. The G-20 finance ministers will likely endorse the work to date in a statement this week but that will not be a final agreement. A public consultation on the blueprints has begun now and position papers due December 14 with hearings to follow at the OECD in January.
The real news of the release is the extension of a year end 2020 deadline by six months to mid-2021. The delay is primarily due to COVID disruptions this year and the tight US presidential race which should come to an end next month, but there are also political and technical differences which will take time to resolve. The consultation period gives all interested stakeholders breathing room to critically review the blueprints in the next two months. The adaption of the blueprints is still uncertain, however, and largely depends on the US appetite for agreement. It is still too early to predict with certainty how US Congress and the impacted companies themselves will react to the over 500 pages of analysis and technical detail in the blueprints. There will be more insights when the public consultation papers are published sometime after December 14.
In the meantime, tension has been high between the US and other jurisdictions that have enacted so-called unilateral measures to tax tech giants in the consumer jurisdiction while the OECD deliberations continue. The US argues that these measures discriminate against US tech giants. The jurisdictions argue that political factors require these measures be enacted to mitigate the tax leakage in digital business models on which the OECD project is based. These jurisdictions argue that these taxes will be repealed if OECD agreement is reached and implemented and, if not, can remain in place as a revenue raiser.
The OECD blueprint now offers terms for a coordinated withdrawal of “relevant” unilateral measures upon final agreement. Further details will be provided following the public consultation but the timing of this coordinated withdrawal is likely to match the timing of the coordinated implementation of the OECD solution, meaning the effective date for implementing national legislation.
The US has been quite upset with the proliferation of these unilateral measures. The strategy of Congress and the US administration has been to threaten trade sanctions against those countries that have adapted or have legislation to adapt unilateral measures. The US put its threatened sanctions on hold until January. With the extension of the project decision deadline to mid-year 2021 and the solution to withdrawal baked into the blueprint, the US could simply postpone further its trade sanction threats.
If a Biden administration comes into office in January, the trade sanction threat may dissipate as a matter of policy of the new administration. Earlier this month, the Financial Times reported last month that Antony Blinken, a senior foreign policy advisor to the Biden campaign, told a Chamber of Commerce audience that a Biden administration would not conduct artificial trade wars with Europe (without specifically referencing unilateral taxes). There will likely be no need for the Biden campaign to take a position on the OECD project this close to election day. Notwithstanding any Biden administration position, Congress is likely to remain skeptical about buying into the pillar one global solution next year. Pillar 2 is a lot less controversial for the US since it arguably is based on a global minimum tax concept enacted under the Tax Cuts and Jobs Act of 2017 under the Trump administration that US companies are still in the process of digesting the rules almost three years later. But it is the law today and is likely to remain so. The optional element proposed by US Treasury Secretary could be a make or break condition for the US under either administration next year.
The von der Leyen Commission pledged even before it took office that it would propose an EU “go it alone” solution for digital taxation reform if the OECD did not reach an agreement by the year-end 2020 deadline. The Commission likely has options in development already but it quickly announced this week it would honor the extension to mid-2021 and not take any action before then. Candidates for the “go it alone” solution include the global minimum tax which may have already interested the EU when the US adapted its version at the end of 2017. The Commission likely still does not have the votes to revive its “unilateral” tax proposal in 2018, the digital services tax, which ended up inspiring a number countries in the EU and elsewhere to enact such a tax at the risk of attracting the ire of the US. But oddly a “digital tax” was put back on the Commission agenda when Council President Michel added it as an EU level “own resources” tax levy this summer to help finance the 750 billion EU bail out package. Own resources is the term used to describe a direct levy by the EU to finance the EU budget. The digital tax will be specifically earmarked for the EU bailout budget. European Parliament supports this initiative but not all member state finance ministers have an appetite for another digital tax proposal. Hopefully the EU due diligence process will be allowed to run its course. It will be interesting to see if this newest EU digital tax proposal comes within the scope of the unilateral measures that are to be withdrawn and abolished forever in an OECD agreement. Would the US threaten more action against this EU digital tax? We could know soon. The Commission has promised to retaliate against the US for trade sanctions against any single member state.
That leaves the countries that have enacted unilateral taxes or are considering enacting such taxes. One could imagine a rush by more jurisdictions to enact these taxes given the uncertainty today that any OECD agreement will be reached this year. The acting countries may have to risk US trade sanctions (or not, according to the analysis above). There may be safety in numbers, however, when trade sanctions of one country, the US, are the weapon of choice. Just in the last two weeks the African Tax Administration has published a report that includes suggested drafting for a digital services tax for its 39 member countries, 24 of which are in the inclusive framework. It is loosely based but largely inspired by the 2018 Commission version.
Rick Minor, a US tax lawyer, is an Atlantik-Brücke member and a member of the OECD technical advisory group on consumption taxes. The views in this note are his own.