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OECD Chief Warns of ‘Messy’ Outcome Without Digital Tax Deal

Posted on May 26, 2020

If there is no globally agreed solution to tax the digital economy, then dozens of debt-laden countries will move unilaterally, raising the risk of trade wars during the coronavirus pandemic, the OECD’s chief warned.

OECD Secretary-General Angel Gurría reiterated May 22 that the OECD-led work on a two-pillar solution to tax the digital economy remains on track to meet its year-end deadline. He expressed optimism that the OECD will have a package of measures to present to G-20 leaders at their November summit under the Saudi Arabian G-20 presidency, despite a slight shift in plans caused by the COVID-19 crisis.

Gurría was speaking during a webcast organized by the Inter-American Dialogue about the effect of the pandemic on Latin American countries and the world at large.

Without agreement on the solution, some 40 or 50 countries “will feel the absolute political imperative to tax the digital economy themselves, each one on their own,” which may draw the ire of the United States, Gurría said. He pointed to the recent threats from the United States to slap retaliatory tariffs against France after it introduced a digital services tax, which the U.S. government views as discriminatory against American companies.

“Then you turn a tax situation into a trade war, but right now with dozens of countries . . . you can immediately see that’s the last thing we need in the world, right now, in the middle of the pandemic,” Gurría said.

Nearly 140 countries within the inclusive framework on base erosion and profit shifting are aiming to reach agreement on the solution during their rescheduled plenary meeting in early October. Governments expect the solution will allow them to tax multinationals that raise revenues with little to no physical presence in their jurisdictions.

“What we hope is that we can do it, but also it needs the political will of every single country [in the inclusive framework] and the alternative really is quite messy,” Gurría said. “Therefore, we believe countries would choose to do the right thing.”

Tax-to-GDP ratios in many OECD countries have been coming down slowly over the years, Gurría noted. That trend will stop because countries will have a lot of debt related to the coronavirus pandemic and will be under more pressure than ever to raise tax revenues, he said.

Digital taxation has become a hot issue because multinationals have been able to game the system to pay little to no tax in the jurisdictions in which they operate, according to Gurría. “So, we’re looking at a minimum level of taxation, [and] we’re looking at how to charge taxes on an increasingly digitalized economy,” he said.

Governments need revenue to serve the needs of their citizens, which is part of the social contract, Gurría noted. “The lack of that is precisely what has created this crisis of confidence,” he said, adding that two-thirds of the public in Latin America say they have no confidence in their governments. The crumbling of the social contract means that “it’s more difficult to make anything stick,” leaving countries in “very difficult shape,” Gurría added.

Gurría’s comments came a day after OECD tax chief Pascal Saint-Amans warned that U.S. businesses “may be the victim of bad actions” if the global tax overhaul project is delayed and countries start introducing their own measures to tax the digital economy.

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