The G-20 continues to push forward on an OECD-led solution to modernize the global tax system, since countries hit hard by COVID-19 will soon need to think about economic recovery, a top Saudi minister said.
During an April 15 virtual press conference, Saudi Minister of Finance Mohammed Al-Jadaan said that the G-20 understood that at the beginning of the pandemic, countries were more focused on their immediate crisis management needs.
“That said, we have not stopped — we are continuing to work with the OECD to ensure we advance the digital economy taxation file,” Al-Jadaan said. “[It’s] actually more relevant today than before as countries start to recover from the crisis and start to think about the means to ensure they repay their debts; they manage their debt-to-GDP [ratio]; and think about fiscal levers they have.”
The project is essential, so the G-20 is working with the OECD and other stakeholders to ensure they push a solution forward, Al-Jadaan said. He was speaking after G-20 finance ministers and central bank governors met virtually to discuss their action plan to support the global economy during the pandemic. Saudi Arabia holds the G-20 presidency.
Al-Jadaan’s sentiments echoed that of the group’s April 15 communiqué, which underscored that the OECD’s tax project was still firmly on the agenda.
“We reiterate our commitment to use all available policy tools to safeguard against downside risks; ensure a swift recovery; and achieve strong, sustainable, balanced, and inclusive growth, while continuing to tackle the global challenges, notably those related to addressing the tax challenges arising from the digitalization of the economy and enhancing access to opportunities,” the communiqué says.
The G-20 had mandated the OECD to lead countries to a multilateral solution to address the tax challenges of the digital economy, aiming for agreement by the end of 2020. On the table is a solution based on two pillars, with pillar 1 calling for a “unified approach” to revising profit allocation and nexus rules and pillar 2 comprising a global anti-base-erosion proposal to introduce minimum corporate taxation.
Nearly 140 countries belonging to the OECD inclusive framework on base erosion and profit shifting are aiming for political agreement at their next meeting, scheduled for July 1-2.
Countries hope the multilateral solution will allow them to tax multinational companies that raise revenues in their jurisdictions with little to no physical presence under current tax rules and work on remaining issues that the original BEPS project did not address. The solution is also expected to discourage the spread of unilateral measures, such as revenue-based digital services taxes.
The OECD secretariat said March 17 that the work on the solution is still on track despite the growing pandemic. However, some business groups have pushed to delay the project’s timeline as companies grapple with the economic fallout of the coronavirus crisis.
The G-20 communiqué follows an April 14 chair statement after G-7 finance ministers and central bank governors held a virtual meeting to discuss coordinated responses to fight the COVID-19 pandemic. The statement said the group would refocus on the global tax overhaul work once the urgency of the coronavirus crisis tapers off. The United States holds the G-7 presidency.
“It shows that countries are aware that, in spite of all the disruption from [COVID-19], addressing the tax challenges of the digitalization of the economy remains a priority, and it seems to justify that the technical work continues, [so] that as soon as the effects of [COVID-19] abate, we can help decision-making by ministers,” Pascal Saint-Amans, director of the OECD’s Centre for Tax Policy and Administration, told Tax Notes.
Thinking Ahead
Countries have taken decisive action in response to the unprecedented health and economic crises by implementing containment measures and adopting policies to support business cash flow, household incomes, and jobs, the OECD said in a report for the G-20.
The report, which OECD Secretary-General Angel Gurría presented to the G-20 ministers and governors April 15, outlined how tax and fiscal policy measures are helping to soften the economic effect of containment. Those measures will play an even bigger role once containment restrictions are relaxed and governments shift to working on economic recovery, the report adds.
Tax revenues will likely plunge for several years because of the pandemic’s direct effects and the fiscal policies governments had to adopt to keep their economies afloat, the OECD said. Although tax policies can help restore public finances, the crisis prompts reflection about the possibility of new and revamped tax measures, the report says.
As a result, it’s likely that addressing the tax challenges of the digital economy will become more prominent in a post-pandemic environment, according to the report. Although many companies are struggling during the crisis, some may experience profit increases as the world shifts toward teleworking and digital commerce, the report adds.
“Increased use of digital services and the need to expand revenue raising could provide new impetus to efforts to reach agreement on pillar 1 issues internationally,” the report says.
Increasing pressure on public finances could also contribute to greater demand for effective minimum taxation of multinational enterprises, the OECD noted.
“Where some countries may need to engage in difficult fiscal choices after the crisis, the demand for effective global implementation of the . . . proposal under pillar 2 will be higher, not least to ensure that there is a level playing field in the levels of effective taxation between major MNEs and [small and medium-size enterprises that] may suffer disproportionately from the crisis,” the OECD added.
The report adds to a growing list of coronavirus-related resources the OECD has posted in recent weeks, including suggestions for immediate short-term tax measures that countries can adopt to respond to the crisis; tax treaty interpretation guidance addressing pandemic-related cross-border tax issues; and a reference document outlining business continuity considerations for tax administrations.