David Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International, the online daily publication formerly known as Worldwide Tax Daily. This week, showing their work plan. The OECD has reported to the G-20 on its progress toward finding a new consensus on taxing the digital economy. Here to walk us through where things stand is Tax Notes Today International Chief Correspondent Stephanie Johnston. Stephanie, welcome back to the podcast.
Stephanie Johnston: Always a pleasure to be here.
David Stewart: Why don't we start with — what is this workplan that the OECD has produced?
Stephanie Johnston: The workplan came out on May 31st, it's about a 40-page document, kind of outlining what the workplan will be for the subsidiary bodies and technical groups working within the OECD Centre for Tax Policy and Administration. What they're going to do is develop some of the options that countries have kind of put forward and have indicated that they are interested in pursuing to form the foundation of a solution in 2020 to address the tax challenges of digitalization. So, if you'll remember from a previous podcast, the inclusive framework is a group of 129 countries that are committed to implementing the BEPS project — the key elements of the BEPS project. And they agreed on working in some on additional standard setting that was left over from the BEPS project. So, what they had agreed on — three options under one pillar. They're calling them pillars, they're really themes. Pillar one is about the allocation of taxing rights and nexus issues. So here, countries are sort of looking at, you know, how can we give more taxing rights to market jurisdictions. Or how can we create a new nexus or a new permanent establishment definition to capture the activities of digital companies or companies that are engaging in digital activities. So, that is pillar one. And the basis for pillar two — it’s focusing on corporate minimum taxation. And this is championed by France and Germany, who in November of last year put out a proposal. It's called the global anti-base-erosion proposal. GLOBE is what they're going with. So, the GLOBE proposal has two main components: an income inclusion rule — to tax the income of a controlled entity or a foreign branch, if that income is [taxed at an effective rate that] falls below a minimum tax rate. And also includes a tax on base-eroding payments, which would deny a deduction or impose a source-based tax, like a withholding tax, on some payments unless it can be taxed at or beyond a minimum rate. So, this proposal constitutes pillar two.
David Stewart: So this GLOBE proposal, it sounds like it's based on the U.S. Tax Cuts and Jobs Act GILTI and BEAT provisions.
Stephanie Johnston: Exactly, and the workplan also includes a chapter on what the OECD is doing in terms of doing impact assessments and economic analysis of all the options on the table, just to give countries more information about where they want to go, in terms of what they want to support, as part of the solution in 2020.
David Stewart: So how is this workplan received?
Stephanie Johnston: It's been fascinating to cover this workplan since it was published on May 31st. That was right before a major conference, the OECD USCIB conference in Washington, DC. There we saw a lot of business actually responding to this workplan. And it seemed that they were responding to it pretty positively because it provided them a little bit more certainty, a little bit more details about where the OECD is going, where countries are going. And so I think it was pretty well-received there. A lot of interest in what this plan actually means and what kind of results it will yield. So that still remains to be seen. The workplan was also pretty well-received at the G-20 finance ministers' meeting in Fukuoka, Japan, where I just came from. There was a tax symposium there on Saturday where more than a dozen finance ministers appeared on one stage and discussed their thoughts on where this conversation is going as far as the digital economy by 2020. Which was fascinating because this was the first time, to my knowledge, that any finance ministers have gotten in a big group, sat down, discussed what they were thinking, where the positions are, and what they think is needed for consensus. They're really working on a really tight time frame. In the workplan, the OECD has indicated that agreement on a general architecture of a solution should be agreed on by January 2020. And I've heard from Pascal St. Amans and other senior officials that they are hoping to get some political agreement by the end of 2019, which is, you know, just around the corner. So, in general, response was really good. Finance ministers recognize that urgency is required, that they need to work fast, and that they are apparently willing to compromise on getting there.
David Stewart: Now one of the major participants in this will be the U.S., since a lot of these digital companies are here in the U.S. Did we hear anything from Treasury Secretary Steven Mnuchin about the U.S. position going forward?
Stephanie Johnston: Yes, he was one of the speakers at this tax symposium on Saturday, and that was interesting because I've never heard him speak at length about the taxation of digital economies, so that was really interesting. He didn't say a whole lot new. He said, you know, the U.S. is totally onboard with coming up with solutions and are willing to work with their counterparts on getting to agreement. But he did say, which was interesting, that he was going to dedicate as many senior-level resources as possible to this work. He also made it clear that a solution should not unfairly target digital companies. It should apply both to digital and non-digital companies and also be sustainable for the future. Which is a concern because whatever is decided should be able to be applied to whatever new business models will crop up in the future. So that was really very interesting.
David Stewart: Nirmala Sitharaman was recently named finance minister of India and India has always had a much different position to the U.S. Did she have something to say about the digital economy at the meeting?
Stephanie Johnston: So, she basically reiterated what India has always wanted, which is they want a significant economic presence, which is a new kind of permanent establishment definition that would effectively capture some of these activities that digital companies have that aren't captured by regular tax treaties. So, she didn't say a whole lot new, but it was interesting to see her in action for the first time, because she was just appointed on May 31st.
David Stewart: Did any other finance ministers have things to say that caught your ear?
Stephanie Johnston: So, French Finance Minister Bruno Le Maire and German Finance Minister Olaf Scholz were both there and we've heard a lot about what they think and France wants, what Germany wants. But we have always wondered, you know, what does China think, where does China stand on this? And actually at the OECD USCIB conference, Pascal St. Amans actually kind of briefly mentioned China because someone asked about what they think. And he mentioned, you know, China is always been sort of a silent or, you know, quiet partner in all of this, which definitely caught my ear. So I was paying particular attention to what the Chinese finance minister, Liu Kun, was saying during the symposium. If you think about China, China has a very similar profile in terms of digital companies and companies that would be affected by whatever changes the OECD inclusive framework is gonna be deciding on. It was interesting to see Minister Liu speaking publicly about China's position and to see how much it does actually align with what the U.S. has always been saying about what this global solution should look like. So, Minister Liu called for any solution to avoid double taxation, to tax where value is created, to allocate more taxing rights to market jurisdictions, and it should not be too overly complex. He also called for any unilateral measures to be removed after a global agreement has been reached. So, that's something that the U.S. has always said too.
David Stewart: You touched a bit on what will be happening over the next year. But what exactly are the next steps in this process?
Stephanie Johnston: According to the workplan, there's going to be separate work streams. So, you've got the technical work being done by the working parties and the subsidiary bodies and within the OECD. And then you've got the political — kind of wrangling that's going on among the higher-level ministers. So as far as what the finance ministers will be doing now, the G-7 finance ministers meet in Chianti, France, in July. And there Minister Le Maire said that he was hoping to get consensus just among the group of seven finance ministers and use that consensus to build the foundation for further consensus at the G-20, which meets in October in DC. So, there is a general hope among finance ministers that they will come to some kind of consensus by the end of the year and use that going into January, I think, was the framework where they're expected to officially agree on the architecture of a solution by the end of 2020.
David Stewart: Well, Stephanie, thank you for that update, especially since you literally just got off a plane coming back from the G-20. Where can listeners find you online?
Stephanie Johnston: They can find me on Twitter @SoongJohnston. That's S-O-O-N-G-J-O-H-N-S-T-O-N.
David Stewart: Thank you for being here.
Stephanie Johnston: Good to be here, thanks. I'm gonna go take a nap now.
David Stewart: Well-deserved. And now, Coming Attractions. Each week we preview commentary that will be appearing in the next issue of the Tax Notes magazines. We're joined by executive editor for commentary, Jasper Smith. Jasper, what will you have for us?
Jasper Smith: In Tax Notes Federal, Larry Axelrod discusses how disposing of remaining shares after a partial redemption may be considered part of the redemption, as well as the renewed opportunity for stock basis shifting in the scenario. Also, Alison Dougherty examines how foreign investors in the United States can avoid penalties related to Form 5472, which is one of the inbound U.S. international tax reporting and compliance forms involving reporting corporations.
In Tax Notes State, Garry Fujita addresses some tax issues that may have gone unnoticed after Washington state placed substantially more tax burdens on its taxpayers. Also, Billy Hamilton discusses how some jurisdictions are using taxes to address housing issues.
And in Tax Notes International, Reuven Avi-Yonah and Ajitesh Kir comment on an Indian public consultation, concerning India's rules for profit attribution to permanent establishments, which represents the first time a national government has proposed abandoning the arm's-length standard. Also, Yaron Katz and Brett Bloom consider the consequences of keeping excess cash offshore and the new U.S. federal income tax consequences of repatriating that cash to the United States.
We also want to remind listeners of the approaching June 30th deadline for our student writing competition. For more information, visit taxnotes.com/contest.
David Stewart: You can read all that and a lot more in the June 17th editions of Tax Notes Federal, State, and International. That's it for this week. You can follow me on Twitter @TaxStew. That's S-T-E-W. If you have any comment, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or a review, wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.
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