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17 December 2020 / news

Comments on the OECD’s Pillar 1 and Pillar 2 reports

Loyens & Loeff participated in the OECD public consultation on the updated Pillar One and Pillar Two proposals that seek to change the taxation of the “digital economy” and introduce global minimum taxation for large MNE groups. Aside from addressing technical issues, we stressed the need for simplification, the importance of avoidance of double taxation and raised some more fundamental design concerns.

Public consultation OECD/G20 Inclusive Framework on the Reports on Pillar One and Pillar Two Blueprints

On 12 October, the OECD/G20 Inclusive Framework (IF) launched a public consultation document in relation to the released Reports on the Pillar One and Pillar Two Blueprints in order to further refine the package and to address remaining issues. Loyens & Loeff has submitted (publicly available) written comments to the IF. A public consultation meeting on the Blueprints will be virtually held on 14-15 January 2021.

Aside from responding on certain technical issues, we stressed the following more general and fundamental considerations on the Blueprints.

1 Simplicity / manageability, avoidance of double taxation and conflicts between countries

A first consideration, which has guided our answers and, in our view, should apply to both Blueprints, is the key goal of ensuring simplicity / manageability of the rules both for taxpayers and tax administrations. A balance should of course be found with fairness / equality and treatment, but recent experience with the implementation of certain BEPS recommendations in EU directives and national laws shows that rules sometimes become too complex. This complexity materialises not only in terms of information needed to comply with the rules but also in the vagueness of the drafting, which creates substantial legal uncertainty and a serious risk of overreach. Clarity and certainty are some of the most important requirements for rules in the field of taxation, and the significant overhaul of international taxation that the Blueprints propose must be accompanied by clear guidance for their implementation and interpretation. The detrimental effects of a lack of clarity (such as double taxation and conflicts between tax jurisdictions) would be amplified by the multitude of jurisdictions involved. Part of the solution to achieve sufficient certainty and clarity could be to introduce the proposed measures in a more limited scope, e.g., targeting only Automated Digital Services (ADS) for Pillar One, and introducing only some of the top-up taxation measures in a first stage for Pillar Two. For Pillar One, we recommend that this is initially only introduced for ADS and not (or only at a later stage) for Consumer Facing Businesses (CFB): notwithstanding the reduced number of taxpayers affected, the rules would still result in many complexities to implement as an overlay over the existing national tax systems. Only once Pillar One has been successfully implemented for ADS should it be considered to also implement such rules for CFB, given the much larger group that would be impacted. Such extension should only occur once there is an efficiently working system in place that will not result in unnecessary interference with business processes of multinational groups.

2 Tax policy

A second consideration that we raised is that taxation is not a goal, but a means. Tax policy is a tool and the resources generated by the tax intake serve to pursue policy objectives which may differ from state to state. These policy objectives, just like the level of taxation, are intrinsically linked to the democratic decision-making process – at least since the 18th century – and should therefore be determined in the context of such process. Adopting new rules which introduce a global minimum taxation (Pillar Two) and shift taxing rights between jurisdictions (Pillar One and, to some extent, Pillar Two) will require to consider also mechanisms to ensure the people are part of the process and able to debate what to do with these increased resources. This is all the more important as experience, e.g., in the European Union, shows that the greater the coordination between tax (or monetary) policies, the more important it becomes to also align on economic policy goals. Of course, the proposed Pillar One and Pillar Two rules would leave quite some leeway to individual countries to set certain features of the tax policy, such as the tax rate. However, the increased coordination required and brought by these proposals requires thinking about a corresponding “qualitative jump” in “supranational democracy”. Debating what we want to achieve as a global community by creating new public resources and shifting taxing rights amongst national (and sub-national) jurisdictions is unavoidable.

Looking in greater detail at the policy goals will also enable to assess whether the Pillar One and Pillar Two proposals actually help solving key global challenges.

  • In the context of the COVID-19 pandemic and the gigantic cost for public finances, any increase in resources is clearly welcome from a mere (sound) budget policy perspective. This is, however, a special situation and the efforts to reach a consensus on Pillar One and Pillar Two predate the pandemic.
  • Looking at global challenges such as climate change or global inequalities and (extreme) poverty in some regions of the globe, it is questionable whether the proposals help solving these. In the absence of defined policy purposes and climate-related criteria, there is no guarantee at all that the additional resources to be produced by the Pillar One and Pillar Two rules would be invested in suitable projects. Furthermore, the proposals entail no measure to encourage economic actors to change behaviour and become more environment friendly.
  • As regards global inequalities, while Pillar One may help a few populous developing countries raise additional revenue (if they are able to build in the necessary tax administration resources), Pillar Two’s main rule – the Income Inclusion Rule – would allocate taxing rights to the jurisdiction where the group’s ultimate parent entity is resident, without any consideration for which countries’ tax base is eroded. Developing countries, which are the most in need of additional resources to tackle challenges such as poverty and shifting towards a greener economy, would likely not get a (material) share of the additional tax levied. More generally, the Income Inclusion Rule seems to pay little attention to where the economic activity takes place and where the significant value-adding people functions are located.

No unilateral measures

In addition to the above, we have praised the IF initiative of trying to bring forward a proposal to find a consensus solution to address the challenges of taxing the digitalized economy. In general, we are of the view that the Pillar One proposal is a preferred solution over unilateral initiatives such as Digital Services Taxes (DSTs) that have been adopted by several countries. Pillar One needs further improvements, but a good coordinated proposal should reduce the risk of disputes and double taxation. Moreover, a unilateral DST levies a tax on the revenue of the company, instead of on its profits. This may impose a disproportionate tax burden on digital companies that are hardly profitable or even loss-making such as start-ups and other companies that are being (heavily) affected by COVID-19. Such companies would still be liable to the DST, regardless whether they make a profit or not, whereas the Pillar One proposal is based on the profits of the company. In particular when calculating Amount A losses are taken into account making Pillar One a more proportionate measure, which is preferable over a DST.

The target deadline for an overall political agreement on Pillar One and Pillar Two is mid-2021. We will keep you informed about further developments. For a summary of the reports on Pillar One and Pillar Two, please see our Tax Flashes on Pillar One and Pillar Two. You can access our contribution here and the comments made by all stakeholders here.

Should you have any questions or want more detailed comments on the above, please contact a member of our Digital Economy Taxation team or your trusted Loyens & Loeff adviser.



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