Telecommunication Trade Groups Seek Exclusion From OECD Proposal

From: Mullet, Mark S <mark.s.mullet@verizon.com>
Sent: Tuesday, November 19, 2019 11:59 AM
To: Harter, Chip <LafayetteChip.Harter@treasury.gov>; Poms, Douglas <Douglas.Poms@treasury.gov>
Cc: Kautter, David <David.Kautter@treasury.gov>
Subject: Telecommunications Submission to the OECD on Pillar 1

Dear Chip and Doug,

I am attaching comments made by our industry from both sides of the Atlantic regarding the OECD's Pillar One. The industry is united as both papers argue that telecommunications should be excluded from Pillar One.

As a heavily regulated industry, like financial services, we believe there is nothing to be gained subjecting our industries to a new anti-avoidance tax regime. Telecommunications companies are facilities based domestic companies that do not possess the characteristics, even within our consumer facing businesses, that are the target of Pillar One. Allocating profits from a domestic business to overseas countries would not make sense in our view. As a result of our longstanding agreements for transmission of services, international taxation of our industry is clear and noncontroversial and the arms-length standard is working as intended. We believe opening a new regime of taxation for highly regulated domestic carriers like ours would be inappropriate.

We would be happy to answer any questions you might have regarding these submissions. Thank you!

Best Regards,

Mark Mullet
Federal Tax Policy Director
Government Affairs

1300 I Street, NW #500E
Washington, DC 20005

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November 11, 2019

Tax Policy and Statistics Division
Centre for Tax Policy and Administration
Organization for Economic Development and Cooperation
2, rue André Pascal
75775 Paris Cedex 16
France

Dear Sir or Madam,

On behalf of our members, CTIA is pleased to submit the attached comments on the Public Consultation Document: Secretariat Proposal for a "Unified Approach" under Pillar One ("PCD"). As the trade association for the US wireless communications industry, CTIA represents a diverse group of companies from the leading carriers and manufacturers to mobile application developers and content creators. We greatly appreciate the opportunity to provide these comments on the proposed Unified Approach.

While our members offer a variety of services, our comments will focus on the impact of the PCD proposals on telecommunications services, including wireline, mobile, broadband and others. Telecommunications services include fixed line (i.e., wireline) and wireless telecommunications services. The fixed line telecommunications market is defined as the revenues obtained by operators for voice telephony and other non-voice information transmission using fixed lines (wirelines), rather than wireless systems. The wireless, or mobile, telecommunications services market is defined as including cellular (mobile) phones, tablets and any other wireless or cellular telecommunications services.

These businesses generally can be divided into two components: (i) enterprise telecommunications services provided to other businesses and governments; and (ii) telecommunications services provided to consumers. In order to provide these services, our member companies either have a taxable physical presence or contract for connectivity through third party carriers in all of the market jurisdictions where we offer our services.

Our comments will focus first on various scoping issues with respect to the proposed Unified Approach affecting the telecommunications industry. We will then address a few of the policy Issues raised in the questions presented by the PCD.

1. Scope: Amount A under Proposed Unified Approach Should Not Apply Generally to Telecommunications Industry

For the following reasons, we do not believe that Amount A under the proposed Unified Approach should apply to the telecommunications industry¹:

A. Global enterprise businesses are not consumer-facing businesses

The ambit of Amount A is limited to large consumer-facing businesses, "e.g., businesses that generate revenue from supplying consumer products or providing digital services that have a consumer-facing element"² The PCD suggests that some sectors should be specifically carved out of Amount A. We believe our member's global enterprise businesses are not the types of businesses targeted by Pillar One and should be explicitly excluded.

Our members' global enterprise businesses provide telecommunications products and services to businesses and governments. These products and services further the customers' own operations and are not on-sold to consumers. Thus, we believe these global enterprise businesses dearly should not be treated as consumer-facing businesses for purposes of Amount A. We respectfully request that an example or a list be provided that expressly carves out, as not “consumer-feeing," the sale of telecommunications products and services by global enterprise businesses to businesses and governments that are used by the customers for their own benefit

B. Consumer telecommunications businesses are appropriately taxed today and should not be subject to Amount A under Proposed Unified Approach

The proposed Unified Approach recognizes, in today's increasingly digitalized economy, that a range of businesses can "project themselves into the daily lives of consumers (including users), interact with their consumer base and create meaningful value without a traditional physical presence in the market."³

While the PCD acknowledges that those consumer-facing features could be relevant for any business, the proposed Unified Approach appears to target as its scope those consumer-facing businesses where the following features are significant and can more easily be carried out from a remote location: (1) customer engagement and interaction; (2) data collection and exploitation; and (3) marketing and branding. It is that subset of consumer-facing businesses that the PCD appears to subject to a new nexus rule and revised profit allocation rules to ensure such businesses are subject to an appropriate amount of tax in market jurisdictions. At the same time, however, the proposed Unified Approach "would retain the current rules based on the arm's length principle in cases where they are widely regarded as working as intended."⁴

As described more fully below, the current arm's length pricing rules (and nexus rules) are "working as intended" with respect to our members' consumer telecommunications businesses. Moreover, such businesses do not possess the characteristics listed above in both a "significant way” and in a manner that "can more easily be carried out from a remote location." Accordingly, we believe that our consumer telecommunications businesses should not be in scope of Amount A under the proposed Unified Approach.

Consumer telecommunications businesses are generally highly regulated and maintain a physical network in all of the jurisdictions in which they operate directly. Consequently, they have a significant physical presence (i.e., nexus) in all of the jurisdictions in which they operate and have customers. They cannot, in the words of the PCD, "create meaningful value without a traditional physical presence." Their income from providing services to customers in their home market jurisdictions is effectively confined to such jurisdiction (except for roaming services described below) and already taxed appropriately there.

Consumer telecommunications businesses do not market or seek customers outside the jurisdictions in which their networks are located. A carrier with facilities in a single jurisdiction will only offer retail service to consumers in that jurisdiction. Bilateral roaming agreements between carriers allow customers to make and receive calls, send and receive data, or access other services when travelling outside the coverage area of their carriers' home networks. Third-party network roaming charges and other access costs are negotiated by the carriers and already reflect an arm's length price. The third-party carrier is properly taxed in the local market jurisdiction. Any remaining profit from providing roaming services should be attributable to sales, marketing and other customer services in the consumer's home country and are taxed appropriately there.

Because these businesses are being taxed appropriately under the current rules, there is no need to modify the profit allocation or nexus rules with respect to consumer telecommunications businesses. We therefore respectfully request that these businesses be excluded from application of Amount A of the proposed Unified Approach.

2. Determinations of Scope and Amount A Should Be Permitted on a Line of Business Basis.

According to the PCD, business line segmentation may be necessary, e.g., to prevent certain distortions in Amount A from blending results of high and low margin businesses.⁵ We agree that allowing business line segmentation is necessary, but not just for purposes of determining Amount A. It should also be allowed in applying scope exclusions and thresholds.

While we understand allowing business line segmentation creates additional complexity and may not always align with available financial reporting, we believe it is essential to avoiding economic inefficiencies and inequitable treatment of similarly-situated businesses.

For example, a low-margin company may be discouraged from acquiring a high-margin business if it either (i) causes the company as a whole to exceed the threshold for treatment as “large" or (ii) subjects the low-margin business to potential application of revised profit allocations under amount A. Similarly, an excluded business (such as a mining business) must be allowed to diversify without potentially tainting its exclusion from the proposed Unified Approach for the original business. Also, failure to allow business segmentation may cause taxpayers inefficiently to sell, spinoff, or otherwise dispose of a line of business.

Allowing the proposed Unified Approach to be administered on a line of business basis Is critical to treating similarly-situated businesses the same. To illustrate, assume there are two equal-sized, not “large" businesses competing in the same industry owned by Company A and Company B, both of which have 5 percent profit margins. Company B wants to acquire a different business (Company C) of equal size that has 25% profit margins. If acquired, Company C*s revenues will cause the overall group to exceed the threshold and be considered large, and thus potentially subjects a share of any deemed residual profit to market jurisdictions under Amount A. Company B is faced with two equally undesirable choices: it can either forego the economically efficient purchase of Company C, or it can acquire Company C and put its business in Company B at a distinct and inequitable disadvantage to its competitor Company A, since Company A's profits would not be subject to being reallocated to market jurisdictions under Amount A. This result can only be avoided by allowing business line segmentation for purposes of applying the proposed Unified Approach.

Finally, failure to allow a business segmentation approach could cause the profits of a wholly domestic high-margin business to be allocated to another jurisdiction where the group has a low-margin business. Such a result is bad tax policy as a business wholly conducted in a jurisdiction with no remote customers or activities should not be subject to tax outside its home country.

While we agree with the PCD that further work should be done on the possible use of business line segmentation, we believe business line segmentation must be a fundamental part of any agreed solution with respect to Amount A for all of the foregoing reasons.

3. Calculating Profits for Line of Business Should Be Based on Books and Records Using GAAP With Appropriate Adjustments (Question 3)

For purposes of Amount A, we believe that an appropriate metric for determining profit by line of business is earnings before taxes (EBT). Taxpayers should be allowed to establish profit and loss for a line of business based on the financial books and records of the relevant entities which may include financial statements prepared pursuant to generally accepted accounting principles (GAAP) of the jurisdiction of the parent company.

Since GAAP may not allow a company to provide segmented income statement detail at the level of EBT for all lines of business, expenses for interest and corporate overhead would need to be properly allocated among business lines in accordance with a taxpayer's books and records. Moreover, in applying Amount A, we believe that taxpayers should be able to adjust for material differences between GAAP and tax reporting. For example, the inability to take Into account amortization of goodwill or accelerated cost recovery schedules under the tax rules of the jurisdiction of the parent company could result In a dramatic impact on industries such as ours.

We believe that taxpayers should be required to make any such determinations of EBT by business lines on a consistent basis, subject to appropriate adjustments for acquisitions and dispositions.

Once again, our members and we greatly appreciate the opportunity to provide our comments regarding the proposed Unified Approach and issues affecting the telecommunications industry. Thank you in advance for your consideration of them.

Sincerely,

Thomas C. Power
Senior Vice President & General Counsel
CTIA
Paris, France

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ETNO — GSM A joint response to the OECD public consultation document: Secretariat Proposal for a "Unified Approach" under Pillar One

About ETNO

ETNO has been the voice of Europe's telecommunication network operators since 1992 and has become the principal policy group for European electronic communications network operators. Its 40 members and observers from Europe and beyond are the backbone of Europe's digital progress. They are the main drivers of broadband and are committed to Its continual growth in Europe.

ETNO members are pan-European operators that also hold new entrant positions outside their national markets. ETNO brings together the main investors in innovative and high-quality e-communications platforms and services, representing 70% of total sector investment.

About the GSMA

The GSMA represents the interests of mobile operators worldwide, uniting more than 750 operators and nearly 400 companies in the broader mobile ecosystem, including handset and device makers, software companies, equipment providers and internet companies, as well as organisations in adjacent Industry sectors. The GSMA also produces industry-leading Mobile World Congress "MWC" events held annually in Barcelona, Los Angeles and Shanghai, as well as the Mobile 360 Series of regional conferences. With over 5 billion mobile connections, GSMA operators are committed to supporting digital and financial inclusion globally.

The telecommunications industry

Prior OECD reports (both tax-specific and otherwise) have espoused the benefits of digital transformation and Information and communications technology (ICT), including the effect on productivity, growth, efficiency, innovation, and social development. The telecommunications industry makes a substantial physical Investment into local ICT networks making communications cheaper, faster and more powerful over time thereby creating the critical infrastructure within each market jurisdiction: the back-bone which enables the widely recognised digital transformation benefits.

Policy Contacts

ETNO
Sara Ghazanfari
Regulation & Economics Manager
gEhazanfari@etno.eu

GSMA
Vasilis Douzenis
Senior Manager, 
Economic Research
vdquzenis@gsma.com

ETNO and the GSMA welcome the possibility to provide their comments below on the policy, technical and administrability issues in response to the specific questions asked by the OECD, and have focused on the key relevant points identified by our members.

Key point summary

• We welcome the recognition of the need for global consensus on this important matter and applaud the OECD Secretariat for proposing an approach that should ensure continuity for businesses by complimenting rather than replacing existing transfer pricing rules and that aims to achieve consistency in the global tax framework by the end of 2020 by limiting uncoordinated unilateral measures.

• We consider that the OECD Unified Approach proposal would benefit from a more cearly articulated principled approach in a number of areas including scope, departures from the arm's length principle, and exactly how Amount A adjustments based upon a MNE Group's consolidated profits can be allocated or reconciled to specific legal entities in order to eliminate double taxation.

• We observe that the OECD rationale Is to target new tax rules on non-routine profits from intangible assets where the MNE Group has no correlated local physical presence in the market jurisdiction such that significant value is generated and monetised remotely. We do not consider that consumer-facing businesses, with routine margins, who have made significant physical and tangible investments In the infrastructure of a country with heavily-regulated revenues generated, monetized and subject to tax within that same market jurisdiction should be the target of any new international tax rules,

• The Illustration provided by the OECD indicates that Group X is highly profitable, earning non-routine profits, significantly above both the market average and those of its competitors. Companies in the telecommunications industry typically do not exhibit any of these characteristics and In particular do not earn non-routine profits. Indeed, data from the Damodaran database indicates that profits as a percentage of sales (a measure noted in the consultation in paragraph 55 as a measure on non-routine profit) in the Telecom (Wireless) and Telecom Equipment and Telecom Services industry sectors were 8.77%, 0.17% and 10.04% respectively for 2018.¹ None of these levels would indicate non-routine profits.

• Further, the telecoms sector is heavily regulated, with long-term investment costs associated with networks and spectrum, and companies are typically required to book local revenues in the market jurisdiction.

• The sector is also subject to existing sector-specific taxes such that companies are already subject to tax in the market jurisdictions. That is, in addition to corporate income tax and other general taxes applicable in the country, many countries already levy a wide range of specific taxes and regulatory fees on local fixed and mobile telecommunication companies. These include:

  • excise taxes on connections, activation and usage,

  • licence and spectrum fees,

  • universal service fund contributions,

  • numbering fees,

  • special communications taxes, and

  • antenna & base station and other network infrastructure fees?²

  These taxes and fees are often charged on a gross revenue basis (hence not creditable against other taxes) and often further reduce the opportunity for telecommunications to generate any non-routine profit.

• Therefore, the telecommunications sector does not display the characteristics which are being targeted by the Pillar One proposal. We therefore propose that regulated industries with specific taxes in the market jurisdiction, such as the telecoms industry, is explicitly made out of scope from the new rules.

• For completeness, we also make the following comments in relation to the proposal itself:

  • We have concerns about the complexity of the new proposals and the required calculations, increased controversy and complex double taxation where Pillar One tax is calculated at a Group level whereas double taxation must be considered on a legal entity basis. We encourage simplicity and recommend a prior agreed-upon effective Mandatory Binding Arbitration for all countries that implement Pillar One.

  • We consider that specific guidance is required such that (already heavily regulated) roaming revenues continue to apply existing transfer pricing rules, are not considered to be "remote sales”, and should not be subject to the new nexus rules. Should the OECD consider that the existing transfer pricing rules are not appropriate for roaming, this should be made clear, and the rules amended accordingly.

1. Scope

• The scope of the proposal now clearly focusses on large consumer-facing businesses rather than highly digitalised business models. Whilst we understand that the OECD will be undertaking further work on scope and carve-outs, we feel it is important to emphasise the unique characteristics of the telecommunications industry and its operators:

  • Whilst telecommunications operators have a significant consumer focus, the industry is heavily regulated, and regulated operators are required to acquire local spectrum licenses, build local network infrastructure and service consumers from the local market jurisdictions where the local customers are based.

  • Regulated telecommunication operators are not reliant on remote sales, and the vast majority (if not all) of revenues from customer sales will be recognised in the local market jurisdiction where the consumer is based.

  • Regulated telecommunication operators do not typically operate marketing and distribution based tax structures — the entities in the local market jurisdictions typically operate as local entrepreneurs with a local legal entity (or permanent establishment), with support from other group entities for economies-of-scale/specialisation efficiencies and consistency. Profits (or losses) arising from local trading activities will be retained in the local market jurisdiction.

  • Specific telecommunication taxes are prevalent in many developing countries that are already adding to the overall tax burden for telecommunication operators.

  • In 2017, operators paid 22% of total revenues in taxes and regulatory fees³

• Any revenue threshold for new nexus should ensure that only revenues generated from that territory at a level commensurate with the revenues generated by the large consumer-facing businesses in the same sector create nexus under the new rule. This would prevent nexus in territories where immaterial revenue streams are generated, and reduce the compliance and administrative burden for MNE Groups.

• In addition, whilst we understand the OECD is further considering how the concepts of consumer products or consumer sales would deal with the supply of goods and services through intermediaries, we are of the view that the OECD should focus on clearly defining B2C activities in scope rather than discussions solely with respect to intermediaries.

• Specific to the telecommunications Industry:

  • Regulated telecommunications operators that generate roaming revenues from operators in other market jurisdictions should not create a nexus in the third party operator's jurisdiction⁴. The customers are those of the parent country not the local country, but just happen to be in the local country. This is very different from the OECD's target of customers of the local territory. Local value is already captured by the local operator.

    The roaming rates applied are heavily regulated (especially in the EU) so should not be deemed to be non-routine, the operator will not have a significant involvement in the economy of the territory of the third party operator, and via inter-operator tariffs the operator will recognise the revenue in the market jurisdiction in which roaming takes place. The existing transfer pricing rules work well for Intra-group roaming revenues such that the local network operator receives an arm's length inter-operator tariffs for voice or data used by a roaming customer on its network.

    As an example, a telecoms operator X with a physical network in country X would currently receive inter-operator tariffs from operators based in countries A, B, C and D when customers of A, B, C and D roam into country X. Some may be related parties, some may not, but third party comparables typically exist. Our view is that operator X should not have a new nexus taxable presence in A, B, C or D and that telco operators in countries A, B, C and D should not have a new nexus presence in country X solely from their customer's roaming activities. Given that MNE Groups may have several operating companies with customers who travel and hence roam into 100+ countries per year, it is important that roaming continues to be covered by the existing and appropriate transfer pricing rules rather than a new regime causing huge administration rules which would not improve the current basis or allocation of taxation.

  • The threshold should also consider years of activity (e.g. 3 years) to Indicate a "sustained" involvement in a particular market jurisdiction.

3. Calculation of group profits for Amount A 

• We expect that other consultation respondents will comment on this topic in much further detail. However, our view is that consideration needs to be given as to whether tax adjustments should be made to the profit/loss) before taxation figure in the consolidated financial accounts for material equity/capital type items in the consolidated financial accounts and non-taxable items in the destination countries (for example, any profit on disposal of investments, impairments etc. that are identifiable from the consolidated financial statements). Whether adjustments should be made for non-deductible items also needs to be considered.

4. Determination of Amount A

• We have concerns that approximating the remuneration of an MNE Group's routine activities, possibly using a simplified fixed percentage approach (even if varied by industry), will not adequately reflect the separate activities in an MNE Group's value chain, which can vary from Group to Group depending upon how each Group chooses to organise themselves. If a simplified approach is taken forward, we recommend considerable consultation with the telecommunications industry, and transparency in the work undertaken in determining an appropriate percentage.

• The OECD also needs to clearly define "routine" and "non-routine" profits (or activities). Specifically, the definition of non-routine profits should be at a profit margin level that truly excludes routine profits. For example, in the telecommunications industry are there any specific activities that are deemed to be non-routine?

• The OECD acknowledge that there is a recognition that the current transfer pricing rules work reasonably well for most routine transactions. We would request that further clarity is given on this statement and that these identified routine transactions are closely aligned with the second step in calculating Amount A (i.e. the approximation of the remuneration for routine activities).

• Splitting deemed non-routine profits between the portion attributable to the market jurisdiction and the portion attributable to other factors is critical in determining Amount A. More guidance is needed on the key factors/attributes to consider here.

• The Illustration provided by the OECD indicates that Group X is highly profitable, earning non-routine profits, significantly above both the market average and those of Its competitors. Companies in the telecommunications industry typically do not earn non-routine profits.⁵

• For regulated industries where "remote sales" are not possible, a "reasonableness test" should be introduced to Amount A such that market jurisdictions which already benefit from high local cash taxes (both as a percentage of the MNE Group's total cash taxes, and above the proportion of the MNE Group's revenues relating to that jurisdiction) should not also receive an Amount A allocation.

5. Elimination of double taxation in relation to Amount A

• Any OECD agreed approach for the reallocation of a portion of deemed residual profit needs to be clearly principled and there need to be clear principles and guidance for the elimination of double taxation (on a harmonized worldwide basis). Specifically:

  • It is imperative that any calculated Amount A based upon the MNE Group's consolidated profits and allocated to local market jurisdictions is reconciled to the legal entities or specific business units that have already recognised and booked the revenue under the MNE Group's current business model, to ensure any double tax mechanism operates correctly. This could include multiple entitles within an MNE group's value chain. MNE Groups require the flexibility to reconcile Amount A profits to legal entities on a fair and reasonable basis for double taxation relief purposes.

  • The OECD are considering a possible income exemption In "Country 1" (e.g. for the entity that owns the IP linked to the non-routine profit reallocated under Amount A). If Income is simply exempted from corporation tax in Country 1, this could limit any foreign tax credit available to the legal entity in Country 1 If withholding tax has already been suffered on a transaction between Country 1 and Country 2 under existing transfer pricing principles.

  • Any rules implemented would need to ensure that local territories do not seek to apply secondary transfer pricing adjustments on Amount A, B, and C adjustments.

  • Documentation to support any double tax relief should be simple with a standard layout, and clear guidelines on compliance procedures should be published and available to taxpayers.

  • Jurisdictions that agree to adopt the Unified Approach should be required to repeal any unilateral DST, or telecommunications sector-specific taxation legislation in force If the solution is also applied to this sector when, the Unified Approach is effective.

  We would welcome the opportunity to discuss and work with the OECD on the mechanics of the above so that our concerns are fully understood.

6. Amount B

• We note that the OECD intends to explore the possibility of using fixed remunerations for an assumed baseline activity in respect of Amount B. We have concerns that it would be extremely difficult to agree the same baseline return across all market jurisdictions. We would therefore urge the OECD to conduct further work in the areas of appropriate safe harbours and ensure this is a minimum consistent standard mandate in all market jurisdictions adopting any new rules.

• More clarity is required from the OECD as to how Amount B applies where the activities of the entity in the local territory go beyond baseline marketing and distribution functions. For example, how should MNE Groups separately identify these activities, and what measures and consistent guidelines would be put in place to ensure local tax authorities do not conduct extensive tax audits into a self-assessed Amount B determination?

• The baseline marketing and distribution functions need to be clearly defined by the OECD.

7. Amount C/dispute prevention and resolution

• We acknowledge that the sovereignty of local tax authorities means that where there are more functions in the local market jurisdiction than the baseline activities subject to Amount B, they will seek to tax additional profit on those extra functions. In order to ensure robust measures are put in place to resolve disputes and prevent double taxation (including the risk that there is duplication of profits under Amounts A, B and C), we recommend that:

  • Effective and prior agreed upon Mandatory Binding Arbitration is a compulsory requirement for any market jurisdictions adopting the new approach, and commitments are made to make the process easily accessible for taxpayers.

  • The current bilateral APA process is too labour Intensive, Inconsistent and time consuming. New formal procedures, time limits and clear consistent application of multilateral APAs across all countries should be part of any agreed Unified Approach.

  • Further work is undertaken by the OECD to ensure the Unified Approach clearly agrees upon the interaction of amounts A, B and C and Pillar Two to ensure there is no risk of profit duplication.