As published on tax-news.com, Thursday February 20, 2020.
In a new report for G20 ministers, the OECD has provided an update on its work to tackle tax base erosion and profit shifting relating to multinational businesses.
The report notes that the Inclusive Framework on BEPS decided during its January 29-30 meeting to move ahead with the two-pillar approach proposed by the OECD regarding reform to tax rules governing the digitalized economy at the tail end of 2019.
Specifically, under pillar one, participants agreed to pursue the negotiation of new rules on where tax should be paid ("nexus" rules) and on what portion of profits that should be taxed ("profit allocation" rules). This work seeks to ensure that multinational enterprises (MNEs) conducting sustained and significant business in places where they may not have a physical presence can be taxed in such jurisdictions.
Pillar Two (also referred to as the "Global Anti-Base Erosion" or "GloBE" proposal) calls for the development of a co-ordinated set of rules to address ongoing risks from structures that allow MNEs to shift profit to jurisdictions where they are subject to no or very low taxation.
The report acknowledges concerns about the proposal from US Treasury Secretary Stephen Mnuchin that Pillar One could be introduced on a "safe harbor" basis, which would effectively make it optional for countries to adopt.
Previously, the OECD said the "safe harbor" issue has been included in the list of remaining work, but a final decision on this issue will be deferred until the architecture of Pillar One has been agreed upon.
In its new report, the OECD said: "This [digital tax] work continues not without difficulties, and some of the 137 members have divergent views on how best to address the tax challenges arising from digitalisation. There are still certain gaps that need to be bridged, one of which is a proposal from the United States as articulated in a letter to me by the US Secretary of the Treasury dated December 3, 2019, to make Pillar One be implemented on a 'safe-harbour' basis. In recognition of this, the G20/OECD Inclusive Framework (IF) noted in its statement that resolution of this issue is crucial to reaching consensus. In particular, many G20/OECD IF members expressed concerns that implementing Pillar One on a 'safe harbour' basis could raise major difficulties, increase uncertainty, and fail to meet all of the policy objectives of the overall process. However, they noted that a final decision on the matter will be taken only after the other elements of the consensus-based solution have been agreed upon."
The plan reiterates the OECD's commitment to delivering a plan to achieve an international agreement by the end of 2020.
Providing an update on its ongoing work, the OECD said: "In the coming months, more data on the economic analysis and impact assessment will be available for the G20/OECD IF to take informed decisions. This timeline is ambitious but failure to reach agreement would greatly increase the risk that countries will act unilaterally, with negative consequences on an already fragile global economy. Critical meetings will take place in the months ahead where difficult decisions will need to be taken on the technical design of both pillars. Although it will be challenging, with your continued political support, I remain optimistic that agreement on key policy issues that would form the basis of a political agreement can be found at the G20/OECD IF's next plenary meeting scheduled for July 1-2, 2020, in Berlin, Germany."
The OECD highlighted the numerous achievements that have been achieved under the BEPS project, in the report. The OECD said the landscape is now more transparent in respect of the tax affairs of MNEs, with almost 30,000 information exchanges on previously secret tax rulings since 2016 (which is 5,000 more since last reported in October 2019); and with 84 jurisdictions having engaged in the exchange of country-by-country reports (CbCRs) on the activities, income, and assets of MNEs, which began in June 2018.
Jurisdictions have also amended or abolished an important number of preferential tax regimes, which allowed MNEs to avoid tax on their international activities, the OECD said. Since 2015, almost 290 regimes have been reviewed and virtually all of the regimes that were identified as harmful have been amended or abolished. Finally multilateral co-operation to prevent treaty shopping has become a reality with the Multilateral Convention to Implement Tax Treaty Measures to Prevent BEPS (the BEPS Multilateral Instrument), covering 94 jurisdictions, 41 of which ratified it.
The OECD said: "At this stage, all treaty shopping hubs have signed the BEPS Multilateral Instrument and tax administrations are reporting that they can see meaningful behavioral changes among taxpayers. The year 2020 is a crucial year with the review of the BEPS Minimum Standards, which could lead to further improvements."
The report also includes a progress update in the area of indirect taxes.
The OECD's recommendations presented in the BEPS project in the area of value-added tax and goods and services tax were carried over to new OECD International VAT/GST Guidelines. They in particular look to establish a global approach on the taxation of electronic services provided by online retailers to consumers.
The Guidelines recommend that foreign sellers register and remit tax on sales of e-books, apps, music, videos, and other digital goods in the jurisdiction where the final consumer is located. The Guidelines also include a recommended mechanism to ensure the effective collection of VAT by tax authorities from foreign sellers.
The OECD reported: "Significant progress has been made in the implementation of the recommended solutions for the effective collection of VAT on online trade, following the 2015 BEPS Action 1 Report. In addition to supporting the implementation of these standards, detailed guidance has been developed to adapt the solutions to the emerging challenges of the digital economy. The guidance focuses on reporting and VAT collection obligations for e-commerce marketplaces and other digital platforms. Current work focuses on the sharing and gig economies"
"Over 50 countries worldwide have already implemented these standards, with very positive results in terms of compliance and additional revenues collected. The European Union reported a constant growth of the VAT revenues collected from these measures, from EUR3bn (USD3.2bn) in 2015 to more than EUR4.5bn in 2018. Australia reported AUD728m (USD489m) of new revenues collected from the implementation of the OECD standards on online sales of services and digital products for the first two years of their operation. South Africa has raised ZAR3bn (USD210m) in the first five years of the introduction of the OECD standards on online sales of services and digital products."
The OECD said: "To support developing countries wishing to implement these standards, the OECD Secretariat has committed to develop regional toolkits. These toolkits will provide further detailed, practical guidance for the implementation of the internationally agreed VAT standards and best-practice solutions, targeted at developing countries. The toolkits will be developed in an inclusive process, involving all interested tax authorities and all relevant international and regional organisations."
The report concludes with sections on OECD-led efforts to improve tax transparency, including in the area of tax rulings, and capacity building efforts to support developing states to implement the BEPS recommendations.