The Latest in OECD Negotiations on Digital Tax

A Conversation With Pascal Saint-Amans

July 17, 2020

Pascal Saint-Amans
Pascal Saint-Amans, the director of the Centre for Tax Policy & Administration at the OECD, talks with Bloomberg Tax & Accounting reporter Hamza Ali on June 24, 2020.

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During Bloomberg Tax & Accounting’s virtual Leadership Forum event in June, senior reporter Hamza Ali spoke with Pascal Saint-Amans, the director of the Centre for Tax Policy & Administration at the OECD. Below, read highlights from the conversation, in which Saint-Amans answered some of the international tax community’s burning questions about the latest developments with the OECD’s digital tax project.

Where do we stand on Pillar One and what can we expect in October 2020?

Pascal Saint-Amans: Well, it’s quite advanced. As you may remember in January, the inclusive framework adopted an outline of what Pillar One could be. So it was an endorsement of the unified approach, and we identified a number of building blocks, which would need to be developed. And by the way, we said, let’s park the safe harbor idea, let’s develop the pillar, and we’ll come back to the safe harbor once the pillar is developed.

We have advanced 11 building blocks – nexus, scope, business documentation, tax base, tax certainty, many [others]. All the aspects of Pillar One have been developed, and they are pretty advanced, some more than others, but overall we can have a report in October, which will show that from the outline in January to where we are, we are near the solution. We are near the agreement. We could even have had an agreement.

For Pillar One, the goal is to have the basis for the deal – it may not be finalized, but it will be showing that we are near a submission, which would be good. And the real test will be [whether] observers say, ‘Yeah, that’s the thing to do,’ or will they say, ‘Oh, no, obviously not, another solution would have been better.’

How are negotiations going on Pillar Two?

Saint-Amans: Pillar Two has advanced more quickly than Pillar One, because we haven’t had this issue of the scope, which more or less blocked the conversation for a couple of years on Pillar One. We’re quite advanced, but the problem with Pillar Two is that it’s a vicious circle because countries will say we cannot talk about the carve-outs if we don’t know about the blending, but we cannot talk about the blending if we don’t know about the rate.

So you have something where you have different building blocks, but you cannot bring them together unless you bring them all together at once.

And interestingly, the last steering group meeting [in mid-June] was an opportunity for some countries, the sponsors of Pillar Two, to make a full-fledged proposal with a proposal on the blending, a proposal on the carve-out, a proposal on the rate. And now we have, I think, a way out of the vicious circle.

What can be agreed in October? The pillar could be agreed to, but a number of countries may say it’s a package – no Pillar Two if we don’t have a Pillar One. Some other countries may say, no, it’s not a package – you have two different pillars and one can go without the other.

Pillar Two is extremely important in terms of structuring the international tax framework. In 20 years’ time, maybe it would be considered as the most important step that has been taken, because it’s really putting a limit to tax competition.

So things are in flux, they’re fluid. There is a G20 finance ministers meeting in July, and there will be a conversation there. And we’ll see what happens. What is for sure is that we keep working, we are alive – we’re not on life support. So Covid has not done too much harm yet, but we recognize the difficulties.

Does the threat of trade war at the end of the year mean that Pillar One discussions could become more difficult in 2021?

Saint-Amans: Yes, absolutely. That’s the risk. … The French have been able to suspend the collection of their DST until December with the view that there would be an agreement. That’s no longer possible. What do you do in that case? It’s hard to suspend the tax further, which would probably require going to Parliament. So I don’t know.

I understand there is this dissonance between the U.S. and the European countries – as facilitators of the conversation we can see this. The U.S. is, in good faith, saying, ‘Listen, we’re talking about trillions of dollars that we need to save the world economy and the U.S. economy. And here, we’re talking about billions.’ You know, the World Bank had the motto ‘moving from billions to trillions,’ and here, you could say, it’s moving from trillions to billion. So it’s a distraction.

But the Europeans respond, and rightfully so, ‘sorry, guys, but it’s a very political and politically important question of fairness. We cannot let it go. It’s been years we’ve been waiting, and beyond the money, you have the question of fairness. We could see the digital economy working well. We could see Zoom booming during Covid, and the shop around the corner being closed. So we need to address it.’

So, no easy way out. I think that everybody understands that waiting for the U.S. election is not unreasonable, but what can you do to limit the risk of trade war? We don’t have the solution.

I think the solution is the credible OECD process, which gives hope that indeed there will be an agreement. Part of this is on us to do the right technical work to show credibility. Part of it is on the shoulders of the politicians across the world.

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