OECD Tax Talk #16 - 22 July 2020

On the agenda of the conference was the discussion of the results of the G20 Finance Ministers meeting, updates in the areas of taxation and digitisation (BEPS project), statistics on corporate income tax, updates on tax projects in cooperation with developing countries and various upcoming publications.

Results of the G20 Finance Ministers' meeting

The G20 Finance Ministers underlined the importance of the BEPS (Base Erosion and Profit Shifting) project and its progress. The report on the project has already been presented to the G20. The presentation of the blueprints for pillars 1 and 2 of the taxation of the digitalised economy, which are to contain the technical details, is expectrd in October. The G20 agrees that, especially under the circumstances of the corona crisis, a global and consensual solution must and can be found this year.

The automatic exchange of information (AEOI ) is also progressing. Data on 84 million bank accounts with a total value of more than EUR 10 trillion has been exchanged. This corresponds to twice the amount compared to the previous year. The exact data can be found in the OECD report "AEOI Implementation Report 2019".

Updates on taxation and digitisation

For the update on the taxation of the digital economy, specifically the further development of the first pillar , Pascal Saint-Amans gives the word and Grace Perez-Navarro. She explains that the technical developments of both pillars have made great progress in recent months, despite the coronavirus. The presentation of the blueprints in October should take place as planned.

Pillar 1 (Unified Approach)

The building blocks of the first pillar were discussed and defined in January 2020. Since then, work has focused on elaborating and refining them. As shown on the slide below the whole pillar is composed of the amounts: A, B and C. Amount A describes the new right of taxation of residual profits of MNEs(multinational enterprises). It thus provides the primary answer to the challenges posed by the digital economy. The exact formula for calculating the tax is still being worked out. Amount B doens't adress problems related to digitisation directly but is included to simplify transfer pricing aspects and to minimise administrative costs. Amount C should meanwhile enable and ensure tax security.

Under amount A, significant progress has been made in terms of tax base, revenue sourcing and loss recognition. Further work is now underway to determine the extent to which corresponding rules can be set up. Some open questions remain concerning the scope and the quantum of services. These are, however, problems that need to be resolved at the political level. Furthermore, great importance is attached to keeping the regulations as simple as possible to ensure the broadest possible application. As far as amount B is concerned, the problem of broad and narrow scope is still being worked on. As far as tax security under amount C concerns, it was decided that the prevention, handling and resolution of disputes should be regulated by two different bodies.

Pillar 2 (GloBE proposal)

Achim Pross takes over and continues with the updates to the GloBE proposal. He explains that the general overview is still the same as decided on in January 2020 (see the following slide). Since then, however, the Income Inclusion Rule (IRR) and the Under-Taxed Payments Rule(UTPR) have undergone significant development. The tax base has been developed in a targeted manner. There are still questions regarding technical aspects of the implementation, which will be answered at a later date. As far as the content is concerned, there is consensus among the numerous members. Here too, simplicity is key. The only problem with this aspect is that simplification for the government often causes the opposite for companies. The aim here is to work with companies and listen to their inputs so that the simplifications made do not lead to extreme compliance costs.

Economic Analysis and Impact Assessment

A flexible analytical framework was set up as part of theeconomic impact assessment. This framework is intended to cover a wide range of parameters of pillar 1 and 2. It is important to note that assumptions made are purely illustrative and cannot predict decisions of the Inclusive Framework (IF), says Åsa Johansson.

The results of the analyses have shown that global tax revenues in the area of corporate tax could increase by up to 4%, or approximately USD 100 billion per year. The firstpillar mainly shifts the situation of tax rights, while the second pillar leads to generally higher tax revenues globally. It turns out that especially MNEs which work in digital sectors are significantly affected by the two pillars. Furthermore, only moderate influences on global investments are expected. This is partly because the majority of companies worldwide are not affected by the changes at all. On the other hand, the investment decisions of the companies that are affected by the pillars, historically, have not been very sensitive to the extent of taxation.

The analyses carried out will only remain accurate if a consensual solution is found. If this is not the case, and various unilateral approaches emerge, then this will result in a greatly increased uncertainty and most likely various trade disputes.

When considering these results, it must be kept in mind that the analysis does not take into account the effects of the coronavirus, as the extent of the ongoing crisis is still is not assessable.

New Model Reporting Rules

In current economic developments the growth of so-called "share economies" and "gig economies" can be observed. The "share economies" are based on peer-to-peer activities, which often enable shared access to goods or services via online platforms. In "gig economies", workers are paid for working a gig instead of receiving a regular wage. Popular examples are taxi services, food deliveries or cleaning services. The gigs are usually found via websites or apps.

The new Model Rules will cover the rental of real estate and various personnel services (transport, domestic help, spiritual and professional services, food delivery). The platforms offering these services will be allowed to collect data and pass it on to the local tax authorities. The local tax authorities will in turn be allowed to share it with the tax authorities of the seller's place of business. This exchange is intended to simplify the completion of the tax return for all parties involved, while at the same time ensuring compliance. How the exchange should work can be seen in the diagram below.

However, Grace Perez-Navarro reiterates that these are only model rules and that they are by no means mandatory. The rules are intended to simplify the handling of the new economic models. This will, of course, be all the more the case if many countries follow these rules.

Corporate Tax Statistics Database with new Country-by-Country Reporting

The statistics for business taxation were published for the first time in 2019. Now the second publication follows. New components include anonymous and aggregated data from Country-by-Country Reporting, Controlled Foreign Company Rules (CFC Rules) and Interest Limitation Rules. Admittedly, the data collected so far is not yet of high informative value and is not sufficient to draw definitive conclusions. Nevertheless, the statistics have provided some valuable insights. They clearly show that there is a large discrepancy between where profits are generated and where they are ultimately taxed. For example, earnings per employee are usually highest where corporate tax is close to zero. In most cases, these locations are also the investment hubs of large companies. Further insights can be found in the chart below:

Update on further publications

• Tax Co-Operation for Development: The publication provides information on the co-operation of OECD with developing countries on tax issues in 2019.
• Tax Inspectors Without Borders: The project is growing rapidly and could will also be strongly elaborated last year. Recently, the project also includes the fight against tax crime.
• Platform for Collaboration on Tax: The new website is now online and the Progress reports from 2019-2020 are now available.

The BEPS Action Point 14 MAP Peer Reviews will also be published in July.

The next meeting of the Inclusive Framework will take place in October.