From Minimum CIT To BEPS

IFC: Firstly, thank you for agreeing to chat with us. It has been an interesting year for the OECD with the primary focus being the global agreement on the implementation of a corporate minimum tax rate. To have such a large number of countries agree on this revolutionary proposal is quite an achievement. Naturally, the initiative has attracted both praise and criticism. So, our first question has to be about the actual implementation.

There has been some debate regarding the recommended ‘country by country’ application of the tax rate versus the ‘global blending’ approach currently implemented by the US’s Global Intangible Low-Taxed Income. Some claim that the ‘country by country” method will deter globalisation as businesses would be taxed more for diversifying internationally and potentially pay higher tax to enter new markets. Some countries have stated that they do not intend to enforce the ‘top-up’ tax while the US may be unable to do so because of GILTI. Is there a way of reaching resolution on these matters?

PSA: The debate within the United States Congress will be resolved internally so we will have to wait and see what the outcome is there. However, with respect to the claim that CbC will deter globalisation, it is important to note that under Pillar Two, the GloBE Rules will actually improve capital export neutrality by reducing the possibility that MNEs’ asset allocation is used for aggressive tax planning. Furthermore, the GloBE Rules will further improve capital import neutrality as MNEs always pay at least the Minimum Tax Rate (15 per cent). This should actually help reduce the competition gap between MNEs and domestic firms thereby levelling the playing field.

In addition, the overall design of the GloBE Rules is intended to ensure that if one jurisdiction does not apply the new top-up tax, other jurisdictions will do so (i.e., MNEs will always pay at least the Minimum Tax Rate of 15 per cent). Moving forward, consideration will be given to the conditions under which the US GILTI regime will co-exist with the GloBE rules pending any modifications made to GILTI by the United States Congress in the coming months.

IFC: There has been concern from some developing countries, where the economy is almost entirely based on the presence of foreign multinationals, that the Pillar Two proposals would reduce tax incentives and thereby make them less competitive. How would you address these concerns?

PSA: Developing countries had a significant influence on the terms of the deal. The agreement acknowledges calls from developing countries for more predictable international rules; provides a redistribution of taxing rights to market jurisdictions based on where sales and users are located, which is often in developing countries; and reduces the incentives for MNEs to shift profits out of developing countries. In addition, the agreement also protects the right of developing countries to tax certain base-eroding payments (like interest and royalties) when they are not taxed up to the minimum rate. Given the pressures on governments to offer tax incentives and tax holidays, the agreement includes an exception from the rules for low taxed activities that have real substance, known as the substance-based carve-out. This means that developing countries can still offer effective incentives that attract genuine, substantive foreign direct investment. In direct response to the concerns of developing and emerging economies, a transition period for the substance-based carve-out was also included in the agreement to give countries some time to adjust their domestic tax policies to fit within the new international environment.

IFC: Already, digital services taxes have prompted proposed tariffs and other counter-measures from the US and others. Could there be a risk that the same will apply to the global minimum tax and, if so, what action can the OECD take to address this if or when it occurs?

PSA: The agreement on Pillar One and Pillar Two was designed with a view to increase – not decrease – tax certainty. The deal has already resulted in a de-escalation of tax and trade tensions. I was heartened to see the agreement reached on 21 October by the United States with Austria, France, Italy, Spain, and the United Kingdom regarding the treatment of DSTs during the interim period prior to full implementation of Pillar One.^[i] Full implementation of the two-pillar agreement will be key to restoring, and bolstering, tax certainty. It is far-fetched to think that tariffs would be implemented in response to the global minimum tax, which has already been agreed by the 136 members of the OECD/G20 Inclusive Framework.

IFC: Now to BEPS and Digitalisation: Addressing the tax challenges raised by digitalisation is a top priority for the OECD/G20 Inclusive Framework and has been a key area of focus of the BEPS project since its inception.

Although there has been global tax reform and opposition from the US, you are persevering with your plans for a digital levy. Can you give us an update on how your plans are progressing?

PSA: No, the OECD has never advocated digital service taxes. There is therefore no “perseverance with any plan for a digital levy”. The EU itself, which had such a plan (I am sure you make a difference between the OECD and the EU), has suspended its plan for a digital levy and is now reflecting on a way forward, which will be fully compatible with the tax deal reached at the OECD.

IFC: The laudable focus of BEPS was on building coherence between different countries’ tax laws, aligning taxable profits with the business functions that contribute to value creation, and also aiming to provide tax authorities with greater insight into the global operations of taxpayers.

How successful has the BEPS initiative been and what remains to be done? Are you able to share any tangible results with us?

PSA: I think the results speak for themselves, as the four BEPS Minimum Standards have delivered concrete results since their inception. The OECD/G20 Inclusive Framework on BEPS currently involves 140 countries and jurisdictions that commit to working together to tackle international tax avoidance. This model, using a combination of rigorous peer reviews, novel international legal instruments, and its inclusive nature has repeatedly proven its efficacy. While the Two-Pillar solution is the most recent success to date, other outcomes from the collaborative work of the Inclusive Framework are also impressive.

Hundreds of peer reviews have been conducted among the membership of the Inclusive Framework, which has led to increased transparency, more effective dispute resolution and the alignment of taxation with where value is created, all of which are key goals of the BEPS Project. Furthermore, the novel Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS has been signed by over 95 jurisdictions and effectively modified over 650 tax treaties concluded among the 68 jurisdictions that have ratified it.

In under a decade, the OECD has collaborated with partners around the world to update the international tax architecture and make it fit for the 21^st  century. Although we have made tremendous progress, more work remains to be done to ensure the advancement and irreversibility of such progress. Peer reviews continue and we are considering how to improve the BEPS Minimum Standards going forward.

IFC: The clamour for a wealth tax continues to grow. In an OECD report published in 2018, it was argued that such taxes could disincentivise risk-taking and entrepreneurship, harm innovation, and impact on long-term growth.

What are your thoughts on this now?  Is this still your opinion or have you reviewed or revised your position?

PSA: The 2018 report highlighted the dearth of empirical studies on the effects of wealth taxes on long-term growth and that it was “difficult to firmly argue that wealth taxes would have negative effects on entrepreneurship”. However, the report also pointed out some of the issues with previous wealth taxes imposed around the world:

• The report showed that past wealth taxes in OECD countries were typically levied on low levels of wealth, meaning that wealth taxes were not just levied on the very wealthy but on part of the middle class too, which ended up penalising households who predominantly held low-return assets and led to liquidity issues.
• The report pointed out that wealth tax bases were narrowed by a range of exemptions and reliefs, which lowered revenue, made wealth taxes more difficult to administer and reduced their effective progressivity.
• The report also considered difficulties that are more inherent to wealth taxes, such as the need to regularly value wealth, including hard-to-value assets.

I am still of the view that - as the report concluded - if countries want to raise revenues and reduce inequality, there might be merit in trying to reform existing taxes first, including taxes on investment income (dividends, capital gains) and inheritances. However, if such reforms are not possible or insufficient to narrow wealth gaps, wealth taxes may be considered but they would have to be designed in ways that avoid the pitfalls of previous attempts (e.g., apply to higher levels of wealth and broad taxes bases).

IFC: Turning now to the topic of digital currency, last year’s OECD report Taxing Virtual Currencies highlighted potential gaps in regulatory regimes for blockchain and crypto-assets across jurisdictions, bringing to the fore the need for a regulatory framework for this sector.

Can you share with us any plans you have to ensure an effective regulatory framework for this sector, particularly at a time when central banks are increasingly considering the adoption of their own virtual currencies?

PSA: The OECD began working on the taxation of virtual currencies in 2020 with the report “Taxing Virtual Currencies” which is the first comprehensive analysis of approaches and differences in the main types of taxes (income, consumption and property) covering over 50 countries. 

In addition, we aim to adopt a framework for the reporting of crypto-assets and the gains or losses arising from their trading. Such a reporting framework will address the tax compliance risks associated with the emergence of crypto-assets and allow tax administrations to obtain and exchange relevant information automatically. This new framework aims to create a standard equivalent to the 2014 OECD Common Reporting Standard so that it can be adopted by all countries, whether or not they have adopted the Common Reporting Standard.

Technical discussions are well underway at the OECD, focusing in particular on the scope of the future standard on the reporting of crypto-assets and on the different types of transactions that will be covered. We hope to reach an agreement during 2022 and present it to the G20 Finance Ministers and Central Bank Governors.

IFC: The OECD is committed to the Exchange of Information as a means of achieving global tax cooperation through the implementation of international tax standards and other instruments to end bank secrecy and tackle tax evasion.

What recent progress has been made by Global Forum members in increasing tax transparency measures and ensuring the implementation of EOI and exchange of information on request standards?

PSA: We have seen huge progress in EOI and international cooperation on tax transparency which, as the Pandora Papers demonstrates, remains as important and topical as it was over a decade ago when the G20 first declared the end of bank secrecy, and the Global Forum remains the leading body on tax transparency and EOI standards. In 2020, information on at least of 75 million financial accounts was exchanged automatically between countries worldwide, covering total assets of nearly EUR 9 trillion. A total of EUR 107 billion of additional revenues, namely tax, interest, penalties, have been identified so far, thanks to voluntary disclosure programmes and similar initiatives and offshore investigations. Of this amount, the standard on the automatic exchange of information helped to deliver at least EUR 3 billion of much needed additional tax revenue to governments. The information jurisdictions receive under AEOI can also be followed up on with targeted requests for further information through the exchange of information on request between countries. Over 250,000 requests for information have been received by Global Forum members in the past ten years, enabling the collection of more than EUR 7.5 billion in additional tax.

Footnotes:

[i] https://home.treasury.gov/news/press-releases/jy0419