Global Tax Rules Negotiations at the OECD
Pieter Baert
Αdviser Economics Department, Business Europe
To tax practitioners around the world, 2020 could mean the start of a revolution in global taxation affairs. In the last couple of years, countries have become increasingly concerned about the challenges the digital economy poses to their taxation systems. To avoid countries installing different unilateral initiatives to address the situation, the OECD has been tasked with coming up with a global, multilateral solution.
Under current tax rules, dating back to the 1920s, countries were given the right to tax companies’ net profits if that company was also physically located in their jurisdiction (the so-called ‘permanent establishment’ principle). This basic rule has worked relatively well for the traditional economy in the past hundred years. However, digital companies are increasingly more able to sell goods and services across borders, without necessarily being located in the country of where their customers are established. With this rise of new innovative digital business models, many countries feel that the tax system is in need of an update. The OECD has responded already, through the BEPS-project, with numerous multilateral measures to already reflect the changes in a more globalised, digitally-driven economy.
However, countries continued to design their own national solutions, such as France’s Digital Services Tax, and therefore the OECD was given the task to come up with a global agreement on the issue of the taxation of the digital economy before the summer of 2020. As a response, the OECD presented two initial proposals in the 2nd half of 2019: the ‘Unified Approach’ (UA) and the ‘Global Anti-Base Erosion’ (GloBE). The UA proposes to depart from the long-established principle of physical presence and would, under a set of certain conditions, give countries the right to tax the profits of a company, even if this company is not physically located there. In short, some of the corporate tax revenue would move towards the market countries (where the consumer is), rather than the origin country (where the company is). The GloBE proposal goes further, and would not only look at the digitalised companies, but would install a minimum corporate tax around the world for all companies. According to the OECD, this is to address ongoing risks from structures that allow large enterprises to shift profit to jurisdictions where they are subject to no or very low taxation.
With BusinessEurope, the federation of European businesses, we follow the OECD negotiations closely and provide input to policymakers to ensure that the voice of European businesses is well-represented in this debate. Companies should be aware of these changes as the possible departure of long-established taxation principles may cause significant shifts in (corporate) tax revenues with further impacts on trade, employment, R&D and the rise of innovative digital business models. With BusinessEurope, we recognise that the digital economy poses challenges to today’s tax systems, and it is clear that the OECD is the right platform to find a way forward on this issue. A broad, multilateral agreement should ensure that new rules are harmonised around the world and thus ensure legal certainty for businesses. While the negotiations still require a great deal of development, it will be essential that in any case any solution at the OECD only taxes net profits and never companies’ revenue, with the rules being as simple and easy to administer as possible for businesses. In addition, the new mechanisms on the allocation of profits and taxation rights should be coordinated with strengthened mechanisms to solve double taxation disputes, where companies are being taxed on the same profit twice by different countries, more swiftly. In addition, an impact assessment should evaluate the results of the measures businesses have been implementing, such as the BEPS-rules and the EU’s Anti-Tax Avoidance Directive (ATAD).
