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Business of Tax 2020

The economy has changes, so must the tax

iStock / Getty Images Plus / Feodora Chiosea

Pascal Saint-Amans

Director, Centre for Tax Policy and Administration, OECD

In our modern world, companies are finding it all too easy to game the international tax system to their advantage . It is increasingly incumbent on the global community to create an updated framework to ensure tax certainty and support international trade and investment.

Globalisation and digitalisation have enabled the rise of new business models, in which multinational enterprises can create value and generate profits in countries where they are not physically present.

Intangible property, which is easy to move around but hard to tax, also plays an increasingly important role in generating profits for these businesses.

But while these developments have changed how and where profits are made, international tax rules, dating back to the 1920s, have yet to adapt accordingly.

Widely perceived as unfair, the current international tax rules are increasingly under strain. Growing public pressure is forcing countries to act in an effort to tax multinational enterprises that are operating in their markets, but which cannot be taxed based on current nexus and profit allocation rules.

The proliferation of unilateral measures decreases tax certainty and any ensuing dispute between countries could negatively impact global trade and investment.

These considerations have resulted in the widespread agreement that the rules must be adapted to the 21st century economy.

Tackling tax avoidance

The OECD, with the support of the G20, has brought together more than 135 countries in the G20/OECD Inclusive Framework on Base Erosion and Profit Shifting (BEPS).

Its members have been working on the implementation of a 15-point action plan to tackle tax avoidance by multinationals, developed between 2013 and 2015 and aimed at improving the coherence and transparency of the international tax system.

The plan includes, inter alia, provisions for eliminating harmful tax regimes and ensuring the exchange of country-by-country reports providing data on multinationals’ global operations and taxes.

For businesses, simpler rules, increased tax certainty and the prevention of double taxation would create an environment that is more conducive to trade and investment.

While good progress is being made on countering BEPS risks in a number of areas, the tax challenges arising from digitalisation continue to be a vexing problem.

In spite of the complexity of these challenges, the G20/OECD Inclusive Framework on BEPS is making solid progress in this domain.

Countries are committed to reaching an agreement on a global consensus-based solution by the end of 2020, the implementation of which would improve tax certainty for both businesses and tax authorities.

The ongoing work is based on a two-pillar approach, which has been informed by extensive public consultations with stakeholders including businesses, academia and civil society.

Two-pillar approach

In a significant step forward, the G20/OECD Inclusive Framework on BEPS agreed in January 2020 on the parameters to pursue negotiations on the reallocation of some taxing rights to market jurisdictions under Pillar One, by developing new nexus and profit allocation rules.

This pillar would ensure that multinational enterprises which conduct sustained and significant business in a given country would be taxed there on a portion of their profits, whether or not the company has a physical presence in that location.

By adopting simple rules and designing effective and robust dispute resolution mechanisms, Pillar One seeks to create an international tax system that is both predictable and easy to administer.

Under Pillar Two, the G20/OECD Inclusive Framework on BEPS is working on addressing the remaining BEPS issues by ensuring that multinational enterprises pay a minimum level of tax. Such measures would discourage businesses from shifting their profits to low-tax countries.

The benefits of a global solution are clear. A recent OECD analysis shows the proposed reforms would increase global corporate income tax revenues by USD 100 billion annually.

For businesses, simpler rules, increased tax certainty and the prevention of double taxation would create an environment that is more conducive to trade and investment.

Why a solution is vital

Nevertheless, significant challenges remain and certain differences between members must be bridged.

Reaching a solution by the end of 2020, as mandated by the G20, is becoming increasingly urgent as the number of governments considering unilateral measures continues to grow, especially in Europe.

What lies in the balance is the result of decades of multilateral efforts to create a predictable international framework that fosters tax certainty.

Failure to deliver on a consensus-based solution will ultimately lead to a patchwork of unilateral measures with negative consequences for businesses and ultimately for growth. Only a robust multilateral response can avert this.

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