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Daily Tax Report: International

Pandemic Delays Global Agreement on Digital Tax to Fall (2)

May 4, 2020, 1:44 PMUpdated: May 4, 2020, 8:36 PM

The OECD will push back to October its target of reaching global agreement on a digital tax plan—which it had hoped to find in July—and may see a “staged process” that lasts into 2021, an official said.

The Organization for Economic Cooperation and Development is trying to find agreement among nearly 140 countries on a global tax overhaul to address how multinationals—particularly tech giants—are taxed in the countries where they have users or consumers.

The OECD may hold a previously scheduled July meeting virtually because of the coronavirus. Country delegates will take stock of progress on the OECD’s 2015 project to combat base erosion and profit shifting, but won’t deliver the digital tax plan then, Pascal Saint-Amans, director of the OECD’s Center for Tax Policy and Administration, said Monday on an OECD webcast.

Countries will meet in October—either physically or virtually—to complete negotiations, he said.

“The reasonable expectation here is that we may have a staged process on at least some of the aspects,” Saint-Amans said. That means implementation details would be decided in 2021—but some aspects of the plan itself may also be, he said. In particular, some parts of “Pillar One” might be decided next year, he said.

Pillar One aims to simplify and rewrite the rules that determine how multinationals’ profits are allocated among countries where they do business.

Still Negotiating Pillar One

One of the key points of friction in the global negotiations over the OECD’s digital tax rewrite remains just how digitally focused the solution should be.

“What we can see are tensions, are conflicts of views. We can see an emerging view on Pillar One, Amount A, that it should focus on digital,” Saint-Amans said.

But the U.S. and China oppose a solution that targets the digital economy, he said. The U.S. has threatened trade wars against countries that implement unilateral digital tax measures, as France did last year.

“We are assessing it, and members are discussing this,” he added.

Key countries have differed on important policy points in the negotiations, so it isn’t surprising that the OECD might adopt a phased approach, said Jeff VanderWolk, a partner at Squire Patton Boggs in Washington and a former OECD official.

Points of tension include disagreements between European countries and the U.S. over whether part of Pillar One should focus on digital companies or target a broader swath of multinationals, he said. There’s also a disagreement between the U.S. and other countries on whether Pillar Two, a global minimum tax rate, should be applied to each country where a multinational does business or on a globally blended basis.

“It’s not apparent how they’re going to bridge those gaps,” VanderWolk said.

And it may be even harder for countries to reach a compromise during the pandemic.

“The Covid crisis, because it is affecting everybody’s ability to collect revenue, is going to make the political decisions about who’s a surrender state, and how much they’re giving up, more difficult,” said Carol Doran Klein, vice president and international tax counsel at the U.S. Council for International Business.

“The political calculus has gotten harder because governments are spending a lot more money to rescue their economies, and they’ll be a little more jealous of reclaiming their taxing base,” she said.

Delaying During Crisis

The Information Technology Industry Council, which represents a number of the biggest U.S. tech companies, said in a statement Monday it remained “confident the process will move forward” to reach a multilateral solution.

But other business groups have recently called for a delay in the project, as have “one or two countries,” Saint-Amans said.

The delay makes sense because companies and governments will have trouble focusing on the digital tax work now, with so much of their attention consumed by the pandemic, said Jesse Eggert, a principal at KPMG LLP in Washington and a former senior adviser with the OECD’s Center for Tax Policy and Administration.

“I think it’s going to be challenging for a lot of people, business included, to engage on this work, given everything else that’s going on,” Eggert said. “With that said, I think there are reasons to want agreement quickly, in order to forestall further unilateral actions.”

The OECD is also facing pressure from a growing number of countries pursuing uncoordinated unilateral digital taxes as they wait for an international solution. If the effort fails or is long-delayed, even more countries could press ahead with their own measures, possibly sparking a trade dispute with the U.S.

“I think the OECD found themselves caught between two sets of competing forces and are trying to strike a compromise,” Eggert said.

Check out Bloomberg Tax’s country-by-country roadmaps covering direct and indirect tax developments.

(Updates with comments from Carol Doran Klein in 15th paragraph.)

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; Vandana Mathur at vmathur@bloombergtax.com

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