Future Global Tax Talks Must Clearly Define the Problem to Solve

As the members of the OECD Inclusive Framework prepare to discuss whether new global tax rules are needed, they should begin by asking just what problem needs to be addressed.

Unfortunately, over the course of more than 10 years, the Organization for Economic Cooperation and Development has failed to provide an answer to that question.

Neither of the Inclusive Framework’s two pillars can be viewed as a success at this point. It’s been more than four years since they were endorsed and about seven years since they were first unveiled as “workstreams.”

Pillar One’s Amount A, which sought to reallocate residual profits of large multinational companies to countries where their sales take place, was effectively dead on arrival when the US Congress learned in 2022 that it would be a revenue loser for the US.

It was sidelined—a zombie proposal—ignored but waiting in the wings while work focused on the effort to launch Pillar Two.

Today, fewer than half of the Inclusive Framework’s members participate in Pillar Two, and the OECD was pressured to create a side-by-side carveout for the US.

Implementation of the two pillars has suffered from a common weakness: a failure on the part of the OECD Inclusive Framework to clearly articulate what problem each pillar was meant to solve.

In the case of Pillar Two, advocates have cited different rationales: leveling the playing field, countering profit shifting, or eliminating tax competition, whether fair or unfair. In the case of Pillar One, there is an urgent need to discuss what problem it was meant to solve.

US negotiators have indicated that they are willing to engage in the discussion, provided that it steers clear of the Amount A zombie and looks instead at new approaches. Before any new proposals are discussed, the participants should first try to agree on exactly what is problematic under the current international tax rules.

This has been tried in the past without success.

Amount A Origins

The first action item in the original global tax overhaul plan from 2013 was to “identify the main difficulties that the digital economy poses for the application of existing international tax rules and develop detailed options to address these difficulties.”

After two years of work, the OECD Inclusive Framework was unable to agree on any recommendations. Its conclusions in October 2015 found that “it would be difficult, if not impossible, to ring-fence the digital economy from the rest of the economy for tax purposes” but pledged to continue working “in consultation with a broad range of stakeholders, and on the basis of a detailed mandate to be developed.”

After more than two additional years of work, the OECD Inclusive Framework, in a 2018 report, was still unable to define the problem or to propose any solutions.

The report noted that digital tax issues “are technically complex, and this interim report identifies the different views among countries on whether and to what extent the features of highly digitalised business models and digitalisation more generally should result in changes to the international tax rules.”

There was no recommendation due to a lack of “consensus on the merits,” but the OECD pledged to provide an update on progress in 2019 in hopes of a consensus-based solution by 2020.

Pillar System

No update was published in 2019 on the digital economy work alone. Rather, two new workstreams were announced: Pillar One and Pillar Two. A short statement issued in January 2019 said that work on the first pillar would look at issues of nexus and profit allocation “without prejudice.”

Subsequent work led to the blueprints on the two pillars and, ultimately, to the October 2021 endorsement of the plan following the significant changes that were successfully pushed by the new US administration during 2021.

Pillar One’s Amount A was broadened to cover all very large and profitable multinational groups, regardless of the degree or type of digitalization of their business models. Just how this addressed “the tax challenges of digitalization” remains unclear. Warnings that the two-pillar project was undergoing “mission creep” turned out to be fully justified.

This history should be viewed as a cautionary tale by members of the Inclusive Framework. Any new discussion of proposals to address the tax challenges of the digitalization of the economy will need to be preceded by agreement on exactly what those challenges are. Without such agreement, future work will continue to be an exercise in futility.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Jefferson VanderWolk, partner at Squire Patton Boggs, was head of the tax treaty, transfer pricing, and financial transactions division at the OECD Center for Tax Policy and Administration.

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