David Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: OECD update. We're at the International Fiscal Association Congress in London and I'm joined by chief correspondent Stephanie Johnston. Stephanie, welcome back to the podcast.
Stephanie Soong Johnston: Happy to be here. Thanks.
David Stewart: So, you just did an interview. Who did you talk to?
Stephanie Soong Johnston: I spoke with Pascal Saint-Amans, the director of the OECD Center for Tax Policy and Administration and he gave us a bit of an update on the current state of the OECD's work on addressing the tech challenges of the digitalization of the economy.
David Stewart: Let's go to that interview. But before I do, I should note for listeners that we're doing these interviews out in the wild as it were, so there may be a strange noise from time to time. Enjoy.
Stephanie Soong Johnston: Pascal Saint-Amans, thank you for coming back on the podcast. 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 year-end 2020 solution to tax digitalization, so we wanted to ask you some questions. Last time we spoke after the G-7, you'd 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 one, 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, one Indian and G-24 in developing countries on the significant economic presence. And 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 and I suppose the panel of the OECD IFA in a couple of days will allow us to identify a number of building blocks of what the unified approach could be and 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. I mean, 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: Well, I mean, it's good news not for us. I mean, yes, of course, for us at the OECD, but frankly speaking, nobody cares about us. And what matters is that it's good news, I think for countries, good news for taxpayers that we are moving towards finding a common approach which may fix deficiencies of the international tax system and allow the tax system to be long-standing, to be sustainable, including facing these challenges arising from the digitalization of the economy.
Stephanie Soong Johnston: And at that G-7 meeting, the U.S. and France had 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. And 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 and I would say so Biarritz was the place where the G-7 took place, but also in the run-up to Chantilly, which was the place where the finance ministers of the G-7 met mid-July, there were some tensions in particular between France and the U.S. France being the country enacting a domestic legislation providing for a unilateral measure taxing highly-digitalized business models on the turnover basis, which did not please to say the least the U.S. and the U.S. president in particular, which triggered a bilateral discussion. We, the OECD, were not a part to 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. But 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. But it's also a signal, I think, that countries willing to take unilateral measures may face some backlash from the U.S. It's clear. I mean, the threats to tax French wine as a French citizen, of course, 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 needs to be ironed out at this point on pillar 1?
Pascal Saint-Amans: Many issues need to be ironed out. I mean, the first one is: Can we move from these three competing approaches to a unified approach? That's the main question. And 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, such as new profit allocation rules which may shift more taxing rights to the market while addressing the issue, which is addressing 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? So, you can see that you have 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 paper which has been discussed, it was only a few days ago by the steering group of the inclusive framework. The full inclusive framework will be meeting on the first of October in the format of the task force of the digital economy, which we should rebrand by the way, but the 134 members will have these elements they will be able to discuss. There will be some public release, probably early October, if there is no strong objection to what the secretariat is proposing, which is this unified approach. And then there will be a discussion at the G-20 Finance Ministers Meeting on the 17th of October in Washington and the sites of the full meetings of the IMF and World Bank. And finally, we're all aiming at an in-depth discussion – why not agreement – in January at the inclusive framework meeting. In between there will be a public consultation. 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 again sometime 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. So, we understand that it will likely be modeled after GILTI except perhaps on a country-by-country basis?
Pascal Saint-Amans: As regards to pillar 2, which is integral to a solution and that was agreed last January by the inclusive framework that we should seek a two-pillar solution. As regards to pillar 2, we didn't face the problem of having competing approaches. We just have a number of questions. So, what's the origin of pillar 2? The U.S. enacted its domestic legislation – tax reform – and doing so it did change a number of the fundamentals of the U.S. tax system and that has implications on pillar 1. I mean, possible move to the market, questions on the arm’s-length principle, which definitely remains the basis of a sort of solution, but can you go beyond the answer in principle in some aspects? On pillar 2 it's obvious. The U.S. enacted GILTI and European countries – and beyond Europe – many countries looked at that with envy, especially as they tried in the ‘90s to have something similar to a global minimum tax or fixing the floor, something like that. And the main opponent was the U.S., which at that time didn't want to hear about regulating tax rates or something like that. So, 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? Of course, the rate is probably secondary to what's the base you use and also the blending. I mean, 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? And here there is no agreement. We have the U.S., probably advocating a global average because that's in line with GILTI and I think with a 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 – say, “Well, that's an opportunity to fix the problem of zero tax.” So, there is a discussion going on then and you have another dimension, which is about the under-tax payment rule. How do you do reverse engineering to make sure that if a country doesn't implement the global proposal, well then, the flows are still taxed and that's the under-tax payment rule. You have many other questions like: Do you do carveouts? In their words – If you do an inclusion rule, do you include all income or are there some elements of income which shouldn't be included? Example: tax incentives. You have one country, I think it's known Columbia, saying, “Well, actually if we want to promote the tourism industry, we want to give tax breaks to hotels.” If other countries take them back, then it removes the incentive. That's just an example, but you may have many others on infrastructure, on IP, and so we need to go through all these elements. I think the different building blocks are clearly identified. We're just now in the process of working them out and try to see whether some form of consensus can emerge.
Stephanie Soong Johnston: And during early discussions in 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 2.0 in addition to Stephanie Johnston is the French President Macron at the previous G-20 summit. He mentioned in Argentina, in Buenos Aires, he said, “Well, need to move to 2.0, 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. So, in the earlier discussions there were some concerns raised about how do you treat losses? How do you treat companies that make losses, which Uber and a lot of these other nascent tech companies, they 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 the pillar 1, you have the issue of profit allocation. And of course, a number of countries rightfully and companies rightfully point to – well, how do we deal with losses? – and 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 question of timing. I mean, 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? So, these are important questions that are being discussed. And I think all of the countries are pretty constructive in that discussion. And we definitely need input from business to be able to refine the reflection that it's one of the 1,000 questions which arise. I mean, 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, some transactions that something which is new, 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 the proposals. What I would like to say about that is a night during the BEPS project, companies in particular, American companies have been extremely constructive. They have come up with the ideas. Johnson & Johnson, Uber, and a few others. And that's extremely interesting to see that companies are part of the conversation. I understand that in the U.S. you have some companies now waking up and say, “Hey, come on, I mean, this was digital. I mean, it was a digital project and now we're talking about a broader solution than digital. So, what's going on there?” But if you look at the fundamentals, one Congress has been aware, and not only aware, but also encouraging tTreasury to negotiate a multilateral solution that the OECD. Senator Grassley mentioned that, the chair of the Senate Finance Committee. He co-signed the letter with Senator Wyden. So, you can see that there is awareness and I would say support, from what we can see, from Congress. And I would say it's the same from business even though this is a very diverse constituency, including in the U.S. So, it's fact that you have many different perspectives there. But as you've just mentioned, some companies did actually contribute with some concrete proposals and not only tech companies.
Stephanie Soong Johnston: So, 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 treaties, protocols, and that's very good news. I mean, that's very good news for the partners of the U.S. That's very good news 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 that sends another positive signal in addition to the letters sent by Congressmen to Treasury or by the positions taken on the floor by the chair of the Senate Finance Committee indicating that the U.S. is part of a multilateral process, including in its legislative branch.
Stephanie Soong Johnston: And 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. The OECD’s discussion, I'm not sure either, but 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, so it's too early to decide anything on the consequences. But the U.K. is a core member to the OECD. 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. But the G-20 was the body where we started BEPS, where we got a mandate to do additional work on digital, and which is paying a lot of attention to that. 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? I mean 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 the 17th of October in Washington, there will be a discussion on the international tax at these very short meeting of the G-20 finance ministers. I discussed yesterday with the G-20 deputy from Japan, so they're aware. They may not be communique, but for sure, there will be a discussion. My sense is that both Secretary Mnuchin and Minister Le Maire in U.S. and France to keep going on with these bilateral discussions. And 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: And so, final question. I'll let you go after this. 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's 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 – business in particular – and I would invite them all to think of the counterfactuals. After BEPS where 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. And 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 so that we have a more stable and sustainable system for the decades to come.
Stephanie Soong Johnston: Pascal, thanks so much for your time. Always a pleasure to speak with you.
Pascal Saint-Amans: Thank you very much.
David Stewart: And now, coming attractions. Each week we preview commentary that will be appearing in the Tax Notes magazines. I'm joined by Content and Acquisitions Manager Faye McCray. Faye, what do you have for us?
Faye McCray: Thanks, Dave. In Tax Notes Federal, Ara Stepanyan and Steven Felgran present a novel approach to taxing the digital economy. K.C. Chiang argues the utility of the section 245A deduction to exempt some repatriated foreign income from federal income tax may be reduced or even disappear, given how it interacts with the income inclusion mandate of section 956. Eugene Seago and Edward Schnee discuss the Bob Richards rule, which some courts apply to decide who owns a tax refund paid to a consolidated group. In Tax Notes State, Dario Arezzo analyzes the notion that it is generally more favorable for farmers to take bonus depreciation rather than section 179 because the investment tax credit is available on the capital expenditure. Tom Yamachika argues that knowledge of the preemption statutes for three well-known federal programs dealing with managed care may be necessary to draw conclusions about their preemptive scope. In Tax Notes International, Luis Marcelo Nuñez provides background on Argentina's tax system, recent case law, and legislative developments with a focus on conflicts that could arise. Nupur Jalan examines India's laws that prevent base erosion through thin capitalization and considers the applicability of articles 9 and 24 of the OECD model convention. On the Opinions page, Robert Goulder ponders what drives people to pay taxes and examines a recent OECD report on tax morale. And Marie Sapirie writes about electric vehicle credits.
David Stewart: You can read all that and a lot more in the September 23 editions of Tax Notes Federal, State, and International. That's it for this week. You can follow me online at @TaxStew, that's S-T-E-W. If you have any comments, questions, or suggestions for future episodes, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review where ever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.
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