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Interview: OECD Tax Chief Shares Update on BEPS 2.0

Posted on Sep. 23, 2019

Pascal Saint-Amans, the director of the OECD's Center on Tax Policy and Administration, shares the latest on efforts to address the tax challenges of the digital economy with Tax Notes Today International chief correspondent Stephanie Soong Johnston in London.

Read the podcast episode's transcript below. The post has been edited for length and clarity.

 

Stephanie Soong Johnston: Pascal Saint-Amans, thank you for coming back on the podcast. It’s always a pleasure to have you with us.

Pascal Saint-Amans: My pleasure.

Stephanie Soong Johnston: As you would expect, we are very interested in how things are going with the discussion on the 2020 solution to tax digitalization. Last time we spoke after the G-7 meeting, you said that the OECD secretariat is testing a unified approach on a solution to tax digitalization. What can you tell us about it at this point?

Pascal Saint-Amans: Listen, we did adopt in the spring a program of work to implement a solution based on two pillars for addressing the tax challenges of the digitalization of the economy. Sorry for this very long title, but it's very important to understand that it's not about taxing digital companies. It's not even about taxing digitization or digitalization. It's about addressing the comprehensive manner of the tax challenges arising from the digitization of the economy. So, we adopted a program of work and we said in this program of work that under pillar 1, which is about a new nexus and new profit allocation rules, there were three competing concurrent approaches: one U.K. highly digitalized business model, one American and marketing intangible approach, and one Indian and G-24 developing countries’ model on the significant economic presence. We said, “Listen, we cannot deliver in 2020 if we do not have a unified approach.” Since then, we've worked hard developing a unified approach. It's being discussed, so we do not have yet something to communicate upon. There are some ideas emerging. What I think was important since spring was the G-7 meeting. It's only seven countries out of 134 members, but seven important countries including the U.S., which is absolutely key to a global solution, and what I did notice was the communique approved by the G-7 leaders. You will remember that the past G-7 didn't come up with a communique. Here you have a communique and you have one sentencing — we must have a solution at the OECD to address these challenges.

Stephanie Soong Johnston: Which is good news for you?

Pascal Saint-Amans: It's good news for us at the OECD, but frankly speaking, nobody cares about us. What matters is that it's good news for countries and for taxpayers in the fact that we are moving toward finding a common approach. This may fix deficiencies of the international tax system and allow the tax system to be long-standing and sustainable, including facing these challenges arising from the digitalization of the economy.

Stephanie Soong Johnston: At that G-7 meeting, the U.S. and France agreed that France would effectively repay companies that paid their digital services tax on the difference once a solution has been found at the OECD. You said that would raise the stakes for an end-of-2020 solution. Has that effectively played out since then?

Pascal Saint-Amans: It's clear that in the run-up to Biarritz, where the G-7 took place, and also in the run-up to Chantilly, where the finance ministers of the G-7 met mid-July, that there were some tensions, in particular between France and the U.S. France had just enacted domestic legislation providing for a unilateral measure taxing highly-digitalized business models on the turnover basis, which did not please the U.S. and the U.S. president in particular, which triggered a bilateral discussion. We, the OECD, were not a part of that bilateral discussion. But what's interesting is that the outcome of that discussion is we — the U.S. and France — will find a settlement. Part of the settlement is agreeing jointly on a global solution at the OECD. Now how does it play out? It's clear that it does raise the stakes for us because you have this tension and this tension can be solved through a multilateral solution. It's also a signal that countries willing to take unilateral measures may face some backlash from the U.S. I mean, the U.S. threats to tax French wine — as a French citizen, I would be shocked, but that's not relevant to the purpose. But it means that you have trade tensions which can result from this topic and I think that will help get countries building a solution together.

Stephanie Soong Johnston: Speaking of potential tensions, what remaining outstanding issues need to be ironed out at this point on pillar 1?

Pascal Saint-Amans: Many issues need to be ironed out. The first one is: Can we move from these three competing approaches to a unified approach? That's the main question. To get there we need to have a common understanding of what is at stake. What are we trying to solve? Is it only the case for highly digitalized business models or is it broader than this? What about the imperative to improve tax certainty and solutions which would be easy to implement? How can we come up with new concepts such as a new nexus and new profit allocation rules? This may shift more taxing rights to the market while addressing the issue of the tax challenges of the digitalization of the economy. So, is it the whole economy which is at stake or not? And how do you build that in the existing system? You can see that there are a number of questions and these questions are being currently discussed in the inclusive framework. For the time being, it's an intergovernmental discussion. We have a paper that has been discussed. As you know at the OECD, we never move forward without having all stakeholders' input. We need to have a paper to have an input. I think we'll have the paper sometime in early October before the G-20 meeting, which will give plenty of time for businesses to contribute to a public consultation, which could take place late November.

Stephanie Soong Johnston: Let's talk about pillar 2 then. We understand that it will likely be modeled after GILTI under the Tax Cuts and Jobs Act, except perhaps on a country-by-country basis?

Pascal Saint-Amans: In regards to pillar 2, we didn't face the problem of having competing approaches. We just have a number of questions. What's the origin of pillar 2? The U.S. enacted its domestic legislation — the TCJA — and doing so it changed a number of the fundamentals of the U.S. tax system and that has implications on pillar 1. The implications on pillar 2 are obvious. The U.S. enacted GILTI and many countries looked at that with envy, especially as they tried in the 1990s to have something similar to a global minimum tax or fixing the floor. The main opponent at the time was the U.S., which didn't want to hear about regulating tax rates. We clearly have now the conditions for a conversation. There are many pending issues which we are working on from a technical perspective. One of them is the rate. What kind of rates would you go for? Do you look at the average effective tax rate of your companies as per GILTI? Or do you look at it from a jurisdiction-by-jurisdiction basis? There is no agreement. We have the U.S., which is probably advocating a global average because that's in line with GILTI and the philosophy of GILTI, which is to say: “We want an inclusion rule. We don't want to eliminate all tax planning opportunities, but we want to fix a floor to how far you can go.” You have European countries, which probably for some of them — at least Germany, France and few others — is to say, “Well, that's an opportunity to fix the problem of zero tax.” There is a discussion going on then. I think the different building blocks are clearly identified. We're just now in the process of working them out and trying to see whether some form of consensus can emerge.

Stephanie Soong Johnston: During the early discussions of the BEPS 2.0 — can I call it that? Is it that official? BEPS 2.0?

Pascal Saint-Amans: The only person for the time being who called it BEPS 2.0 in addition to Stephanie Johnston is the French president at the previous G-20 summit. He said in Buenos Aires, Argentina, that we need to move to BEPS 2.0. So, why not? We don't yet have a brand, but happy to discuss.

Stephanie Soong Johnston: You heard it first here, folks. In the earlier discussions there were some concerns raised about how to treat losses. How do you treat companies that make losses? Uber and a lot of these other nascent tech companies have many losses — a lot of these unicorns do. What is the current thinking on the treatment of losses in this discussion?

Pascal Saint-Amans: In the pillar 1, you have the issue of profit allocation. Of course, a number of countries and companies have rightfully pointed to that issue. How do we deal with losses? That's core to the discussion. It's a complex discussion because if you think that only routine returns should be allocated to market if it's routine, then you don't take risks. So, question mark on the losses. There should be losses. But if you start allocating residual profit that we would define as the excess return, what goes beyond routine taken as an economy concept more than the traditional transfer pricing concept? In that case, you have the question of the losses. And of course, losses should be allocated. I think nobody disputes that. But then you have some pretty nasty technical questions of timing. If you run losses for a long time and you have the new solution and you get profits quickly after the new solution entered into force, isn't that unfair for the country which had to burn the losses as the country of residence? These are important questions that are being discussed. I think all the countries are pretty constructive in that discussion. We definitely need input from business to be able to refine the reflection that it's one of the 1,000 questions which arise. We’re talking about something which is significant. It may not be a complete fundamental rewrite of international tax rules. It's incremental, but there is a new aspect of moving away from the arm’s-length principle on some aspects and because it's new, it raises many questions including this one.

Stephanie Soong Johnston: Speaking of Uber, has the OECD reviewed Uber's proposal?

Pascal Saint-Amans: We are reviewing all proposals. What I would like to say about that is companies, American companies, have been extremely constructive. They have come up with the ideas. Companies like Johnson & Johnson, Uber, and a few others. It’s extremely interesting to see that companies are part of the conversation. 

Stephanie Soong Johnston: Let’s talk about treaties. The U.S. has made some significant progress with treaty protocols and are working on tax treaties now. Now that the U.S. has broken the deadlock on treaties, how does that change the game or raise the stakes for these discussions?

Pascal Saint-Amans: I think we need to be very modest and careful. Yes, the U.S. has been able to move forward on a number of tax protocols and that's very good news. That’s very good news for the partners of the U.S. and for all international tax processes because it means that the deadlock is no longer there. What does it mean concretely in terms of the U.S. moving legislation or a multilateral convention in the coming months? It's not the right time to talk about that. But it sends another positive signal indicating that the U.S. is part of a multilateral process, including in its legislative branch.

Stephanie Soong Johnston: We are here in London right before Brexit. What is your sense of how Brexit might affect these discussions and the OECD’s work in general?

Pascal Saint-Amans: This discussion? I'm not sure there will be an impact. I would like to know what exactly Brexit will be, when exactly it would take place, and I think on the daily basis this changes. It's too early to decide anything about the consequences. However, the U.K. moving out from the European Union means that the OECD is even more relevant to the U.K., so I don't expect any major change there. On the contrary, I think the U.K. will be even more involved in the OECD, even though they are already a key member and the U.K. delegate has a big influence on the process, both very technical and political. So, no big change to be expected, but again, Brexit has been kind of an adventure which is not finished yet.

Stephanie Soong Johnston: Looking ahead to the Saudi presidency of the G-20, what is your sense at this point of how they will carry forward the implementation and follow-up work?

Pascal Saint-Amans: We clearly have to deliver a solution which goes beyond to the G-20. The G-20 was the body where we started BEPS and where we got a mandate to do additional work on digital. We are talking to the Saudi incoming presidency of the G-20. I was in Riyadh a few days ago to meet the G-20 president, the finance minister of Saudi Arabia. My sense is that tax will be very high on the agenda and Saudi Arabia is very keen on us delivering a solution during their presidency. They will do whatever to facilitate reaching consensus, so it is very positive. Now the question will be a timing question — do we deliver the solution in January 2020? The solution, meaning the architecture of a unified approach on the pillar 1, but with some details in the parameters? Or do we do that in June? And if we don't do that in June 2020, well then maybe it's going to be a failure because we will not reach political agreement by then. So, we're in crunch time. The Saudi presidency is aware, the outgoing Japanese presidency of the G-20 is aware of that, too, and that's why on October 17 in Washington, there will be a discussion on the international tax at this very short meeting of the G-20 finance ministers. There may not be communique, but for sure, there will be a discussion. My sense is that both U.S. Treasury Secretary Steven Mnuchin and French Economic Minister Bruno Le Maire will keep going on with these bilateral discussions. They will be very much keen on having a ministerial discussion where you do not have people — ministers — reading the notes from their teams, but engaged in a real negotiation. That's something we will see and by then I hope we will have been public on our proposal for a unified approach.

Stephanie Soong Johnston: What will be your main message for those here at IFA and for those listening at home about how the BEPS 2.0 work is going and how the other aspects of OECD works?

Pascal Saint-Amans: The main message for all stakeholders is things are happening. They may fail or they may succeed. It will depend on the commitment of governments, of the contribution of the different stakeholders — businesses in particular — and I would invite them all to think of the counterfactuals. After BEPS they were nervous. We have a new project which may even be more fundamental in a sense even though that will just be incremental. But people are nervous. Now, think of what would happen if there is no agreement. I think this idea of a counterfactual which is not, “Oh, state the score with the existing rules and that’s it,” but counterfactual as an increased number of unilateral measures on tech companies. But much beyond tech companies is what we need to have in mind so that all the stakeholders engage constructively and help us design a solution which will be sustainable for the decades to come.

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