OECD Tax Talk #17 - 12 October 2020

In the webinar they discussed the progress of the digital package, the taxation of virtual currencies and other project developments outside of digitisation.

After 70 days of meetings, the entire Inclusive Framework met on 8 and 9 October 2020 to discuss the Digital Package. The meeting was attended by more than 130 states or territories and 13 international organisations with 650 delegates. The information package released includes an announcement of the level of agreement among the participants and the publication of the blueprints for Pillars 1 and 2, which are now subject to public consultation until 14 December 2020.

The development of the project has been somewhat delayed, not least because of the Covid-19 crisis. Nevertheless, despite international difficulties, significant progress has been made, says Pascal Saint-Amans.

The chronological development of the project on taxation of the digital economy is shown in the following diagram:

"Blueprints" for pillar 1 and 2

Unfortunately, no agreement has been reached over the last few months on the details of pillars 1 and 2, but the OECD believes that the two pillars are nevertheless solid foundations for the further negotiations and the consensus finding in the future.

The blueprints that are now published for public consultation contain the most important guidelines, principles and parameters that form the basis for the two pillars. In fact, there are still political and technical differences which require urgent compromises. The solution of all these issues is a top priority for the Inclusive Framework, because maintaining the status quo is not an option for the OECD. Since several of the problems still to be discussed are interlinked, the solution of one problem could well serve to solve others, according to Grace Perez-Navarro. The Inclusive Framework hopes to be able to present an agreement by mid 2021, so that the legislation, international rules and processes can be defined and applied in the jurisdictions as quickly as possible.

The public consultation started on 12 October 2020 and will continue until 14 December 2020. In January 2021, the Steering Group of the Inclusive Framework will start further work with the help of the comments received.

Feedback on the blueprints is eagerly awaited and the OECD hopes to be able to continue the project as quickly as possible, said Pascal Saint-Amans.

The estimated impact of the two pillars

The impact assessment and the economic analysis were carried out by Tax and Economics Department of the OECD. The analysis is a so-called ex-ante assessment, as it is based on many assumptions (concerning parameters and design), because there is no concrete agreement available at this stage. The figures must therefore be viewed with great caution.

The analysis can be summarised as follows:

• Pillars 1 and 2 are expected to increase global corporate income tax revenue (CIT) by USD 50 to 80 billion. The effects of the second pillar are more decisive in absolute figures, because pillar 1 is primarily of a redistributive nature. On average, all countries (low, middle and high income) are able to profit. The only losers are investment hubs (which, according to the OECD analysis, include Switzerland), since taxes are no longer levied only in these places. It is generally assumed that the reforms will boost investment and economic growth worldwide.
• Pascal Saint-Amans remarks that, while developing countries will not be the primary beneficiaries of the new rules for taxing the digital economy, they will be able to protif in the future, particularly from pillar 2. He would therefore like to motivate the respective states to support the project.

According to the OECD, it is also important to mention that the corona crisis is accelerating digitization enormously. This leads to a significant increase in new challenges, especially in the field of the taxation of the digital economy. The entire Inclusive Framework believes that a consensusfinding will maximise the chances of solving these challenges as quickly as possible.

Updates to pillar 1

The blueprint of pillar 1 displays the content of the reform. Pillar 1 consists of three components:

• A new right of taxation for market countries with respect to a part of the residual profit calculated at company level (= amount A);
• A fixed amount for certain basic marketing and sales functions that are physically carried out in the market states (= amount B);
• Procedures to improve tax security through effective dispute prevention and resolution mechanisms.

Amount A is discussed in chapters 2-7, amount B in chapter 8 and the procedures for improving tax security (formerly amount C) in chapter 9.

The members of the Inclusive Framework agree that new taxation rights, which should no longer be tied to the physical presence of a company, must not lead to a double taxation. In addition, they should be as simple and comprehensible as possible to facilitate rapid implementation. There are nevertheless considerable differences of opinion on the concrete policy objectives and on the technical implementation The problem solving process is continued.

Updates to pillar 2

The entire blueprint is now also available. The second pillar deals with the remaining BEPS challenges. In particular, it is intended to ensure that large internationally operating groups pay a minimum tax, regardless of the location of their headquarters. According to the draft, this is to be done through a series of interlocking instruments.

The GloBE rules (i.e. income inclusion rule and undertaxed payment rule) are discussed in chapters 2-7. In Chapter 8, joint ventures and so-called orphan entities are adressed. The subject-to-tax rules (concerning scope and administrative issues) are found in chapter 9 and the coordination of all these rules is addressed in detail in chapter 10.

The taxation of virtual currencies

The market of crypto currencies is developing very fast. With the cooperation of 50 countries, a report has been developed which describes the tax treatment of virtual currencies regarding income, value added and wealth taxes.

In particular, the OECD would like to highlight the following findings from the report, which should be considered by countries when taxing virtual currencies:

• There is a need for clear and uniform guidelines regarding the taxation of virtual currencies, which should be regularly updated, and support for administrations concerning the implementation of these directives.
• In order to improve taxpayers' compliance with country-specific tax rules, rules on the valuation of such assets should be as simple as possible, especially for small and occasional transactions
• The tax treatment of virtual currencies should also be aligned with other policy objectives such as those of environmental protection. For example, cryptocurrency trading requires an extraordinary amount of energy, which must be taken into account in a holistic policy initiative.
• Work is already underway on general principles that anticipate the tax treatment of future technical developments. This will enable necessary adjustments to be carried out as promptly and efficiently as possible.

Further OECD projects

In addition to these two topics, which address the challenges of taxing the digital economy, other projects were also pushed forward. There was also progress in the project to increase tax transparency and the Tax and Development Project.

The OECD has also invested a great deal of time and effort in the area of transfer pricing, as numerous uncertainties and questions have recently arisen in connection with Covid-19. For example how losses or subsidy funds received in connection with this extraordinary situation are now to be treated for tax purposes. Problems like these are perceived and tackled by the OECD. Possible solutions or guidelines should be available by the end of 2020.