International tax changes at risk due to US intervention

Out-Law News | 06 Dec 2019 | 2:03 pm | 3 min. read

US opposition to proposed changes to the international tax system could prevent international agreement within agreed timescales, the Organisation for Economic Cooperation and Development (OECD) has said.

In a letter to OECD Secretary General Angel Gurría seen by Reuters, US secretary of the treasury Steven Mnuchin expressed "serious concerns" that changes to the international rules could affect “longstanding pillars of the international tax system”. He is reported as having suggested that there should be a safe harbour in relation to Pillar 1 of the proposals, which would effectively allow US companies to opt out of changes to the allocation of taxing rights between countries.

"Throughout the extensive consultation process, however, we had so far not come across the notion that Pillar 1 could be a safe-harbour regime. We raise this concern, as it may impact the ability of the 135 countries that are now participating in this process, to move forward within the tight deadlines we established collectively in the Inclusive Forum," Gurría said in his letter in response.

Catherine Robins, a tax expert at Pinsent Masons, the law firm behind Out-law, said: "The tone of the OECD's response, shows its frustration that the US is proposing a carve-out from the rules at this late stage, which would effectively negate their effect. The US's approach is disappointing as we badly need an agreed international approach as to how companies should be taxed in the modern world. If the OECD can't get agreement, we will end up with even more unilateral measures than are currently proposed, which will lead to a compliance nightmare for multinational businesses and is likely to lead to double taxation".

In May 2019 the OECD agreed with the G20 a programme of work, divided into two pillars, for addressing the tax challenges of the digitalisation of the economy. Pillar 1 addresses the allocation of taxing rights between jurisdictions and considers proposals for new profit allocation and nexus rules. Pillar 2 focuses on the remaining base erosion and profit shifting (BEPS) issues and seeks to develop rules that would provide jurisdictions with a right to tax where other jurisdictions have not exercised their primary taxing rights or the payment is otherwise subject to low levels of effective taxation.

The OECD is aiming to have an internationally agreed solution to the challenges of taxing the digitalised economy by the end of 2020. The programme of work emphasised the necessity of agreeing the outline of the architecture of an agreed approach by January 2020.

In October the OECD published for consultation a proposal in relation to Pillar 1 that countries where multinationals operate (market jurisdictions) would have a new taxing right over a portion of the 'residual profit' of certain multinational enterprises. The residual profit would be the profit that remains after allocating what would be regarded as a deemed routine profit on activities to the countries where the activities are performed.

The Pillar 1 proposals are likely to have a significant effect on technology and highly digitised companies as they are intended to give some taxing rights to the countries where consumers are based, rather than where digitised businesses have their physical operations. Many of the businesses which could be significantly impacted by the proposals are US owned multinationals.

Pillar 2 is of more general effect as is it is more focussed on ensuring that income is subject to an agreed minimum rate of tax. The OECD has not suggested what that rate should be, but French finance minister Bruno Le Maire suggested recently that it should be 12.5%, which is the current rate of corporation tax in Ireland.

In his letter Gurria invited Mnuchin to Paris for talks "at this critical juncture" including Bruno Le Maire “ideally before Christmas”.

An increasing number of countries have taken or are proposing to take unilateral action to introduce interim measures to tax part of the revenues of foreign owned digital companies.

France has introduced a 3% digital services tax from 1 January 2019 on revenues deemed to have been generated in France by digital companies.

US president Donald Trump has threatened to impose 100% tariffs on imports into the US of French products such as champagne, cheese and handbags.

The UK is also proposing to introduce a new digital services tax from April 2020 which will subject search engines, social media platforms and online market places to a 2% tax on revenues linked to UK 'user participation'. Prime Minister Boris Johnson confirmed again this week his support for the new tax.

Other countries proposing digital taxes include Austria, Italy, Indonesia and Canada.