As published on accountancydaily.co, Thursday December 5, 2019.
US Treasury Secretary Steven Mnuchin has told the OECD that the US ‘firmly opposes’ plans for a global digital services tax, saying that the US has concerns about how the new tax system will ‘have a discriminatory impact on US-based businesses’.
The US is calling for elements of the OECD proposals to be reformed so that they are optional rather than mandatory.
The OECD responded quickly to the US criticism, inviting the Treasury Secretary to Paris to try to salvage the plans for radical digital tax reform, stressing that the US had been a major supporter of the proposals and had shaped early discussions about the proposals.
Angel Gurría, secretary general of the OECD wrote to Mnuchin directly in an attempt to break the impasse.
‘At this critical juncture and to enable us to find the best way forward, I wonder if we could lure you to Paris to meet at your earliest convenience, ideally before Christmas,’ Gurria said.
US support for the tax plan is essential if any tax framework is going to be effective globally. Various countries have already attempted to introduce unilateral tax rules, most recently France, but the OECD is not in favour of a piecemeal approach.
The OECD proposals would change the tax rules to ensure that the largest multinationals would have to pay tax in the jurisdiction in which they are selling their services, rather than offshoring profits to reduce tax bills.
Currently taxing rights generally sit with the resident country of the relevant tech company. In many cases this will be the US although many of the largest players use low tax jurisdictions like Ireland or Luxembourg, for example in the EU, to reduce their tax bills.
In his letter Gurría acknowledged US concerns, stating: ‘We fully share your sense that the international tax system is under intense strain and that a global solution is needed to stop a proliferation of unilateral measures and to help us return to a stable international tax system that avoids double taxation and taxes net rather than gross income.’
The letter cited US support for a unilateral approach, adding that US contributions to the debate had shaped the proposals, broadening the original scope, which initially had only targeted IT giants like Amazon, Google and Facebook, due to a narrow definition of digital sales.
Revised proposals meant that companies involved with online platform sales, for example, were brought into the framework of the OECD’s Pillar One and longer-term Pillar Two proposals.
There is also a time constraint due to increasing public and government pressure to resolve the digital tax issue.
The OECD has set a tight timeframe for changing the rules and has set out a provisional timetable which would see the plans for final agreement on new framework for digital taxes by the end of 2020.
Gary Ashford, international tax partner at Harbottle & Lewis, said: ‘It is, therefore, not unsurprising to see the US challenging such proposals. Interestingly, the OECD has invited the US to Paris at short notice to try and make a breakthrough to what is essentially a political issue.
‘I think everyone expected the US and possibly other countries to oppose some of the proposals, it will be interesting to see if a compromise can be found.
‘The big risk to the international tax model is that if agreement cannot be reached, individual countries will continue to take unilateral action. We have already seen France move to tax digital services and the UK has issued its own proposals to bring in such a tax from April 2020.’
The UK plans to introduce a digital services tax from April 2020, a measure supported by all political parties in their election manifestos.
The OECD proposals are split into two elements, with Pillar one looking at the allocation of taxing rights between jurisdictions as well as various proposals for new profit allocation and nexus rules.
Pillar two, which is also referred to as the GloBE proposal, focuses on the remaining base erosion and profit shifting (BEPS) issues, particularly developing rules that would provide jurisdictions with a right to ‘tax back’ where other jurisdictions have not exercised their primary taxing rights or the payment is otherwise subject to low levels of effective taxation.