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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. Given the COVID-19 crisis, it is increasingly incumbent on the global community to create an updated framework to ensure a fair international tax system, tax certainty and to 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.

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.

In the wake of this crisis, tolerance for tax avoidance will be at an historic low. Growing public pressure is forcing countries to act unilaterally in an effort to tax multinational enterprises, especially highly digitalised companies, that are operating in their markets, but which cannot be taxed based on current nexus and profit allocation rules.

The proliferation of these unilateral tax measures decreases tax certainty, and their design may create double taxation for companies, the costs of which may be transferred to the end-customers. 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).

Since 2016, its members have been working on the implementation of a 15-point action plan to tackle tax avoidance by multinationals under the Base Erosion and Profit Shifting (BEPS) project, aimed at improving the coherence and transparency of the international tax system.

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 the digitalisation of the economy continue to be a vexing problem.

Following a mandate from the G20, Inclusive Framework members committed to reaching an agreement on a global consensus-based solution by the end of 2020.

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

Pillar One would ensure that multinational enterprises that 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.

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.

Pillar Two addresses the remaining BEPS issues by ensuring that multinational enterprises pay a minimum level of tax. Such measures would discourage businesses from artificially shifting their profits to low or no tax jurisdictions.

The benefits of a global two-pillar 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.

Next steps

Work on both pillars has progressed well, with the aim of delivering a blueprint of a solution for each Pillar for the October 2020 meeting of the G20 Finance Ministers, as requested at their July 2020 meeting1.

Why a solution is vital

Despite progress, significant challenges remain and certain differences among jurisdictions must be bridged.

Failure to deliver on a consensus-based solution will ultimately lead to a patchwork of unilateral measures raising the risks of escalating tax and trade tensions2 and increasing tax uncertainty, resulting in negative consequences for businesses and ultimately for growth. Only a robust multilateral response can avert this.

[1] Communiqué (paragraph 10), G20 Finance Ministers & Central Bank Governors Meeting, 18 July 2020 | [2] The United States Trade Representative has opened “Section 301” investigations against eleven trading partners (Austria, Brazil, the Czech Republic, EU, France, India, Indonesia, Italy, Spain, Turkey, and the United Kingdom), which could result in the United states implementing trade sanctions.

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