Digital Tax talks in the time of COVID-19

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Guest article by Alan Rhode:

The official word from the Paris-based Organization for Economic Cooperation and Development (OECD) headquarters is that the ongoing COVID-19 outbreak will not impact the digital tax negotiations and its end-of-the-year timetable to reach a deal.

 But among tax experts, whether they be in government, industry, academia or within large and small accountancy or tax firms, few believe that prognosis. Moreover, many think there is now little possibility to reach by the end of 2020 a consensus among the 135 countries that make up the OECD Inclusive Framework as well as within the G-20.

  And there are pros and cons on whether that is a good or bad thing.

 Those that believe a COVID-19 crisis-related delay will actually be a good thing insist the OECD timetable, as dictated by the G-20, was far too ambitious to come up with a radical reform of the international tax system regardless of how urgent such a change might be needed. Within Pillar I there are not only key unresolved issues about profit reallocation under a unified approach but there are also technical issues regarding double taxation. These include credit and deductions for multinational companies, as well as dispute settlement schemes including binding arbitration.

 There are even more unresolved issues surrounding Pillar 2 and a minimum corporate tax rate, which some experts believe could be the ultimate deal breaker to digital tax deal. That belief revolves around political sovereignty, which many countries do not want to give up, and revenue, which many of the same countries do not want to lose.  The first big issue is the rate itself. Tied to that are technical issues such as blending that would allow countries to offset low tax income with high-tax income when setting a rate. There are also issues involving the Income Inclusion Rule.

 Considering these challenges, some believe the corona crisis will give the OECD a much needed “excuse” to hammer out technically viable and politically acceptable solutions during the course of 2021. The inability to have face-to-face meetings where solutions are often negotiated in corridors, cafes or what is known in EU circles as “confessionals” seem to ensure that a final deal in 2020 will not happen.

 The negative impact of the delay is likely two-fold. The first concerns the loss of focus and political momentum for radical digital reform as the corona virus pandemic spreads and wreaks economic havoc among countries that have been pushing the hardest for it. These are countries led by France, Italy, Spain, the United Kingdom and the host of others that have adopted national digital turnover taxes and face possible retaliation from the United States.

 OECD Tax Director Pascal Saint Amans has made it clear that a trade war could easily break out in 2021 if there is not a digital tax agreement by the end of 2020. Considering that digital companies are less likely to be economically impacted by the COVID-19 triggered economic downturn than traditional brick and mortar companies, the pressure to go with national digital taxes without and end-of-the-year OECD agreement will be nearly irresistible. That is especially true as governments are growingly in the need for new revenue to pay for economic stimulus.

 And then there is the issue of developing countries, the majority of which make up the OECD Inclusive Framework. As the corona pandemic spreads among these countries and eats up already stretched resources, their ability to participate in the OECD talks whether it be later this year or in 2021 will be severely limited. That could seriously undermine the goal of having a true global reform.

 There are some who take a more neutral, sanguine viewpoint on the impact of the corona crisis. They believe it will only prove to be a minor hurdle to finalising a 2020 broad framework agreement that was always going to need another year to fine-tune the technical details.   “Perhaps the broad framework might be delayed but the final agreement was never going to be operational before 2022 or 2023 in any case,” according to one EU official. “In the long run we are not too concerned. The important thing is to get the details right.”

 With all of the above, it is not exactly going out on a limb to predict the OECD digital tax negotiations will give political cover – whether it be intentional or not – to take the necessary time to the get the technical and political compromise needed. Considering the complexity of such a task, if a final agreement is ready by the end of 2021 or even 2022 it will have been worth the wait.

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