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Overtaken by Events: Should the OECD Delay BEPS 2.0?

Posted on Apr. 22, 2020

The OECD inclusive framework is in the midst of something historic, assuming it can finish the job. The ensemble of 137 jurisdictions is trying to revise the international consensus, which for the past century has determined how corporate profits are divvied up among governments with rival tax claims. That’s no small task. The work is being done at the behest of the G-20 nations, and it’s the type of globally coordinated mega-project that comes around only once in a generation.

The endeavor has two principal catalysts: the intuitive appeal of a substantive correction, and political momentum. We’re discovering that the latter of these is the more precious commodity. The OECD is well positioned to deliver on the corrective measures, consisting of the now-familiar two pillars, but the project’s timetable could be jeopardized by the COVID-19 global pandemic. That’s bad news for proponents of the base erosion and profit-shifting project.

The deliverables are due by the end of the calendar year. I hesitate to describe the effort as a rush job, but it has certainly been pushed along at an expedited pace. There’s a good reason for this. The longer an instrument of change sits around, the greater the opportunity for opponents to pin a bull’s-eye on its back. Any delay, however rationalized, can serve as the enemy of a smooth buy-in from stakeholders. Once critical mass is lost, you might never gain it back.

Objections about procedure and timing are often a thinly veiled assault on substance. Pascal Saint-Amans, director of the OECD’s Centre for Tax Policy and Administration, understands this. So do the defenders of the status quo, who would prefer to see the two pillars go away entirely, leaving the international consensus to stumble along for a few more decades.

The concept is familiar to anyone who follows the U.S. legislative process. If a thing lingers, it dies. This explains why the Tax Cuts and Jobs Act was rammed through Congress at breakneck speed. If lawmakers had had more time to ponder the full implications of the participation exemption, they might not have voted for it. At least they would have sought a timeout to kick the tires on the now unpopular base broadeners. Those timeouts are how things unravel. Congressional leaders didn’t let it happen to the TCJA back in 2017. Saint-Amans is doing his best to make sure it doesn’t happen now.

Should the work of the inclusive framework be temporarily placed on hold because of the COVID-19 pandemic? It’s a fair question. If the Tokyo Olympics can be bumped to 2021, why not BEPS 2.0? This article argues that the ensuing controversy is as much about the project’s substance as it is about timing.

The Show Must Go On

On March 17 the OECD released a short statement saying that precautionary public health measures were being taken at its headquarters in Paris, resulting in the suspension of physical on-site meetings. Like countless other workplaces, the OECD staff would switch to teleworking. The statement further announced that the work of the inclusive framework would continue at “full steam” despite the emerging global health crisis. Delegates would conduct their meetings remotely.1

The statement made it clear that the OECD envisions an important BEPS plenary session to take place as scheduled during the G-20 meetings in Berlin July 1-2. We expect both the plenary session and the rest of the G-20 gathering to be conducted as a teleconference, without face-to-face contact. There’s already precedent for hosting these types of high-level meetings remotely. On March 19 President Trump announced that the upcoming G-7 meeting in June, planned for Camp David, Maryland, would be held via teleconference. The pandemic may grind most business models to a halt, but international diplomacy continues unabated, and that extends to multilateral dialogues on the future of corporate tax policy.

Let’s hope the inclusive framework doesn’t get “Zoom-bombed” by hackers. For those not in the loop, Zoom is a popular conferencing app that had been enjoying widespread use during the early days of the pandemic. That was, until an online security flaw emerged in late March. As it turns out, outsiders can hijack the controls to chat sessions on Zoom with relative ease, resulting in all sorts of visual mayhem. Several examples of Zoom-bombing have been well chronicled. One online intruder scribbled the words “alcohol is so good” across the screen during an online gathering of Alcoholics Anonymous. I wonder what kind of sarcastic graffiti hackers would interject to a BEPS plenary session.

Let’s assume these security issues can be satisfactorily addressed. There are other practical concerns. Perhaps you’ve tried to host a teleconference recently. It works great when the online conversation is limited to three or four participants, but things become problematic when you have more than a handful of guests. People can’t help but speak over one another. The inclusive framework is comprised of representatives from 137 jurisdictions plus an assortment of other nonstate participants. Holding an efficient online meeting will be challenging. Nevertheless, that’s the plan.

Not so fast, say industry groups that have been carefully monitoring the OECD tax agenda over the years. The National Foreign Trade Council (NFTC) and the U.S. Council for International Business (USCIB) have separately urged Treasury Secretary Steven Mnuchin to seek postponement of any further work on the BEPS 2.0 project until the pandemic simmers down. The Federation of German Industry (BID) is also calling for a postponement.2

The USCIB letter offers five policy recommendations to address short-term liquidity and employment concerns. The recommendations include deferring direct tax payments, including TCJA transition tax payments under section965, and raising the cap on deductions for corporate charitable contributions under section 170. The letter also recommends delaying the work of the inclusive framework for at least six months. The authors, USCIB President Peter M. Robinson and Taxation Committee Chair Bill Sample, argue that both governments and taxpayers need to channel their resources to better deal with the pandemic:

It is not prudent to drive 135+ countries toward international consensus during a global pandemic when governments must prioritize responding to the crisis, companies are under extreme strain, and travel is not possible.

The letter calls for suspending the implementation of any unilateral countermeasures (read, digital services taxes) during the proposed delay. Fending off a tsunami of DSTs is one of the main reasons Treasury cares about BEPS. Countries like France have agreed to hold off enforcement of their DSTs through the end of 2020 while a new global consensus is being developed. If the inclusive framework should fail, those DSTs are back in play. Neither Mnuchin nor the OECD would have any control over whether European governments revive their DSTs during a stoppage.

The letter also anticipates the OECD’s likely response to the requested delay:

We recognize that the OECD may determine that staff is not needed for other efforts related to COVID-19 and that they therefore may continue to work on technical details of the pillar proposals.

In other words, the OECD can walk and chew gum at the same time. Presumably the ongoing work on pillar 1 (nexus and profit attribution) and pillar 2 (global minimum taxation) will not squander the valuable resources of virologists, epidemiologists, and other public health officials. Anthony Fauci (director of the National Institute of Allergy and Infectious Diseases) is busy right now, so we promise not to ask him what he thinks of formulary apportionment.

The NFTC letter to Mnuchin is more direct. It steers clear of other pandemic response recommendations and focuses exclusively on why BEPS should be delayed. The letter, written by Catherine Schultz, the NFTC’s vice president for tax policy, points out that by one estimate the pillar 1 and pillar 2 reforms would increase the overall income tax hit on multinational businesses by $100 billion per year. Her point is that governments around the world are bending over backward to deliver economic stimulus to businesses (in the hope they will retain workers), so why would you choose this moment to advance a tax policy that cuts in the opposition direction? In short, she portrays BEPS as being anti-growth at a time when the world needs pro-growth policy. That’s not a complaint about diverting limited resources away from public health. It’s an assertion that BEPS is directionally wrong:

In this time of crisis, when policymakers around the world are overwhelmed by the need to introduce economic stimulus measures, the OECD Inclusive Framework’s measures would be better directed at this time toward developing policy responses to the crisis as well as to pro-growth tax policies for when the crisis is over to help deal with the economic consequences that benefit trade, investment, job retention, and growth.

The NFTC not only wants the inclusive framework’s project delayed, it wants BEPS to be oriented toward pro-growth outcomes once the virus goes away. While I respect the candor, it seems they are asking for a paradigm shift. From its inception, BEPS was never about boosting economic growth; it was about notions of perceived fairness and tax equity. BEPS is the revenge of source countries (recast as “market” jurisdictions). Nobody ever said that applying brakes to profit shifting was going to get you more trade, increased investment, and higher growth. But the letter is correct about directional tides. I can’t think of any country contemplating tax increases right now, even for capital income.

It’s not as though the OECD is blind to the global health crisis. To the contrary, OECD Secretary General Ángel Gurría has specifically addressed the economic fallout during a virtual G-20 summit on March 25 that was to have been held in Saudi Arabia. Gurría called for a new Marshall Plan aimed at pandemic relief for affected businesses. The accompanying release references ominous statistical indicators, a loss of 2 percentage points of GDP for each month of containment.3 Some sectors, such as tourism, hotels, and retail, are facing economic calamity. Large portions of the OECD website are now devoted to best practices on economic responses.

What are we to make of this duality? The OECD seeks a coordinated Marshall Plan based on targeted and timely delivered stimulus, yet it won’t delay the work of the inclusive framework. This implies the two projects are not only compatible, but complementary. Do we believe that reforming the permanent establishment doctrine and arm’s-length transfer pricing are not at odds with assisting the business sector as it faces profound struggles?

The point of BEPS is to conceive and implement a better corporate tax base. You’d think that’s not inherently an anti-growth proposition. Or is it? The strongest argument for delaying BEPS seems to rest on the notion that preserving our porous tax base is the functional equivalent of stimulus, and now is not the ideal time to seek change.

There’s already some excellent commentary on the topic. Mindy Herzfeld, professor of tax practice at the University of Florida, regards continued work on BEPS as “untenable” given the present circumstances in which corporate profits have been replaced by losses.4 As she sees it, the prevalence of losses undercuts the central logic of the BEPS project. The BEPS recommendations “proceeded from the assumption that companies would always be profitable,” making it an awkward fit for an environment dominated by red ink. Given our sudden reliance on digital tools for teleworking, Herzfeld thinks we ought to be thanking tech firms for their ingenuity, rather than devising better ways to tax them.

Professor Reuven S. Avi-Yonah of the University of Michigan Law School has a different take. He writes that the COVID-19 pandemic might boost the appeal of pillar 1 in market jurisdictions.5 How’s that? Regardless of losses accruing elsewhere in the economy, he anticipates that major digital services providers could soon be experiencing unusually high profits because of the increased numbers of households in which people are staying home.

Will social distancing and self-isolation translate to record profits for firms like Netflix and Amazon? If so, could a tax that better reaches those profits function like a de facto windfall profits tax? Market countries might come to view a global pandemic as the perfect time to pursue a unilateral DST, or, alternately, to achieve similar outcomes in a more coordinated manner by tossing their support behind the pillar 1 reforms.

Progress vs. Stasis

I can’t help but wonder if efforts to delay BEPS aren’t really about the timetable. What better way to submarine the project than to take an extended timeout? Who’s to say G-20 enthusiasm for rewriting the corporate tax rule book won’t be diminished after a hiatus? Reconvening the inclusive framework in 2021 could feel like starting from scratch. That would be a useful tactic if you weren’t comfortable with the direction in which things were headed.

“Kick it down the road” can very easily become “nip it in the bud.”

It’s certainly no coincidence that the groups calling for postponement are business sector representatives — not the developing economies that regard the international consensus as leaving them with table scraps. Looking around the world, there are market countries that feel poorly served by the current tax regime. Are any of them asking for a delay? To date, not a single one. If I’m wrong, I trust our readers will let me know. Looking at the nongovernmental organization community I see groups like the Tax Justice Network and the Independent Commission for the Reform of International Corporate Taxation, which are generally supportive of pillar 1 and pillar 2 reforms. Are any of them pleading for a delay? Not at all.

I’d like to see Treasury express its view on postponement. I’d bet you that it, too, backs a delay — for all the reasons mentioned in the USCIB and NFTC letters. I get the feeling that Mnuchin wouldn’t lose any sleep if BEPS went away in its entirety.

FOOTNOTES

1 OECD, “Coronavirus (COVID-19): Update on OECD Tax Work,” OECD.org (Mar. 17, 2020).

2 For related coverage, see Stephanie Soong Johnston, “More Trade Groups Call for OECD Tax Overhaul Delay,” Tax Notes Int’l, Apr. 6, 2020, p. 94.

4 Mindy Herzfeld, “COVID-19 Upends the OECD’s Digitalization Project,” Tax Notes Int’l, Apr. 6, 2020, p. 7.

5 Reuven S. Avi-Yonah, “Taxing the Digital Economy: The Effect of Coronavirus on Pillar 1,” Tax Notes Int’l, Mar. 30, 2020, p. 1364.

END FOOTNOTES

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