International agreement on taxing the digital economy needs to be reached by the end of 2020, given the proliferation of unilateral measures, but the solution won’t be simple, according to an OECD official.
Speaking January 10 at a conference titled "The Ongoing Reform of the International Tax System" at the University of Lisbon, Grace Perez-Navarro, deputy director of the OECD Centre for Tax Policy and Administration, said “the solution will not be simple, because we are dealing in an area of taxation which is complex by design.” Multinational corporations are by nature complex, she said, “so there is a limit to how simple the solution can be.”
Following public consultations on both the unified approach for pillar 1 of the OECD’s proposal for updating tax rules for the digital economy and the pillar 2 minimum tax proposal, the focus has turned to the inclusive framework meeting at the end of January, Perez-Navarro said. “Obviously, we’re not going to have a complete package in January . . . but what we do hope to have is the outline of the architecture on pillar 1 [and] further elaboration and definition of pillar 2,” she said. Noting that the OECD must report to the February meeting of the G-20 finance ministers, Perez-Navarro said the next major point in the timeline to watch is the inclusive framework meeting July 1-2.
Perez-Navarro said she remains optimistic that a solution can be reached by the end of the year. “There is a very strong feeling among countries . . . that a multilateral solution is much better than unilateral measures, and that is the alternative to not having an agreement at the OECD,” she said. “If we don’t do it now, then these unilateral measures will continue to surface, and then you have the prospect of real trade sanctions, and that is not good for anyone.”
Although France and the United States are embroiled in their own dispute over France’s digital services tax, “both of those countries are very committed to finding a solution,” Perez-Navarro said. French Finance Minister Bruno Le Maire said January 7 that he and U.S. Treasury Secretary Steven Mnuchin have agreed to work on a resolution in advance of the World Economic Forum later in January. “I think what France and the United States are going to be trying to resolve over the next 15 days is their bilateral issue, but that is not to say they’re going to dictate what the solution is within the inclusive framework,” Perez-Navarro said. “Obviously, that is a much larger discussion.”
Brice Reguimi, an economic analyst with the European Commission, said the United States' position that the pillar 1 proposal should be a safe harbor regime, set out in a December 3 letter from Mnuchin to OECD Secretary-General Angel Gurría, is "concerning" and is not the commission's preferred option. “I do not really see how an optional measure will provide the necessary incentive for businesses to opt in,” Reguimi said, adding that after years of discussion on the issue of digital taxation in the EU, a safe harbor regime would be a difficult sell politically. If at the end of the day “we end up with a solution which would be optional, I think this would create some unrest,” he said.
Reguimi said that if the inclusive framework can’t reach an agreement on digital taxation or if the agreement is too weak to effectively address the digital economy, “there will be a strong rationale for the EU to act alone.”
Other jurisdictions haven’t been entirely positive about the safe harbor approach and have questioned how it would work, but that hasn’t sidelined the development of the pillar 1 unified approach, Perez-Navarro said. “We can continue to develop the proposal, and the U.S. is continuing to engage constructively with us in developing the proposal, and we will get to the issue of whether it should be optional at a later stage,” she said.