Welcome
Daily Tax Report: International

Financial Services May Sidestep Part of OECD Global Tax Reform (2)

Jan. 31, 2020, 10:36 AMUpdated: Jan. 31, 2020, 4:13 PM

The OECD-led effort to overhaul global tax rules will exclude from part of its plan financial services—including insurance and possibly retail banks—as well as commodities, mining, shipping and airlines, and some professional services.

The move provides clarity on one of the most contentious issues since the Organization for Economic Cooperation and Development proposed the plan in October: Defining who the new rules would apply to.

The organization’s effort is driven by concerns that multinationals, especially tech giants, aren’t paying enough taxes in the countries where they have large user and customer bases. Countries agreed at the meeting to a plan focused on two main “pillars.” Pillar One would revamp some of the rules and agreements that determine when and where companies pay taxes; Pillar Two would set a new global minimum tax rate and anti-abuse rules.

The OECD proposed in October to apply part of Pillar One known as Amount A, which represents the largest departure from current taxing rules, to only “consumer-facing” companies but it wasn’t clear which industries would be affected.

Rules that would give more countries taxing rights over multinationals’ profits will apply to companies that sell directly or indirectly to consumers or provide services to users. In-scope sectors would include retail companies, franchise business models, and “automated digital services” like search engines and social media, countries said in a statement released Friday.

Countries are still considering whether the rules should apply to some less heavily regulated financial services companies, as well as financial companies with digital business models, like peer lending platforms, the statement said.

Asking for Carve-Outs

Over the last few months, many industries made the argument that they should be excluded form the rules because they don’t interact with consumers, already pay tax in local jurisdictions where they operate or face heavy regulation.

After a series of meetings in Paris this week, negotiators agreed on a proposed framework to rewrite how the digital economy is taxed and made steps toward answering a number of key questions, said Pascal Saint-Amans, director of the Organization for Economic Cooperation and Development’s Center for Tax Policy and Administration. He was speaking at the OECD in Paris on Friday.

“There are key political decisions to be made and to make that we have to have a framework to make those decisions,” Saint-Amans said.

Negotiators agreed on which industries would be in scope of part of the profit allocation rules known as Amount A under Pillar One, Saint-Amans said. Businesses have been concerned about how Amount A defined “consumer facing” and have cautioned that some industries could be unintentionally hit without a clearer definition.

The Amount A rules should also only apply to companies above a certain revenue threshold, which will be decided later, the statement said.

The jurisdictions also agreed to revisit the U.S. suggestion of a “safe harbor,” which would allow companies to choose whether to opt into the Pillar One rules, or continue to apply current global tax rules. The suggestion didn’t find much support among other countries, and there will be a final decision after Pillar One is fully designed, according to the statement.

The safe harbor plan’s chance of successfully finding consensus among the countries is “close to nil,” Saint-Amans said.

The countries will meet again in July to try to reach agreement on key elements of the work, Saint-Amans said. They’re facing an end-of-year deadline to reach consensus on an overall plan.

“We have a very ambitious timeline to develop all of this technically by July,” he said.

Unanswered Questions

Countries must still find agreement on several other key issues, including whether digital businesses should be treated differently, and how to build mechanisms into the new plan that would help prevent and quickly resolve disputes between companies and tax authorities.

Some countries are pushing for the Amount A rules to reallocate more profits to jurisdictions where consumers are based when a business is digital, or when such jurisdictions are more profitable. The countries don’t agree on whether or how to create such differentiation but will explore the issue, Saint-Amans said.

Countries have also been sharply divided over the issue of how to solve disputes that arise as a result of any new rules. Companies want to see mandatory binding arbitration, which provides them with more certainty and fewer long, dragged out tax disputes. But many developing countries oppose such provisions, which they feel erode their sovereignty.

The dispute resolution issue is key because some countries would give up tax revenue under Pillar One, and are hoping in return to find increased tax certainty through binding dispute resolution provisions for their companies.

“How far can we go in securing effective, binding, mandatory dispute resolution mechanisms, where many countries think that this is contrary either to their interest or their constitution?” Saint-Amans said. “And what is the price to pay for capital exporting countries to get tax certainty?”

Agreement on the question “is considered to be critical to the overall agreement,” the statement said. Countries will continue working toward consensus on the question.

(Updates with reporting throughout.)

To contact the reporters on this story: Hamza Ali in London at hali@bloombergtax.com; Isabel Gottlieb in Washington at igottlieb@bloombergtax.com

To contact the editors responsible for this story: Meg Shreve at mshreve@bloombergtax.com; Joe Stanley-Smith at jstanleysmith@bloombergtax.com

To read more articles log in. To learn more about a subscription click here.