As the Organization for Economic Cooperation and Development (OECD) continues to operate on an accelerated timeline to find a solution to Base Erosion and Profit Shifting (BEPS) by the end of 2020, Grace Perez-Navarro, deputy director of the Centre for Tax Policy and Administration at the OECD, gave an update on the process and explained the need for expedience at the Bloomberg Tax Leadership Forum, which took place on Nov. 19, 2019, at the Newseum in Washington, D.C.
“This work on Base Erosion and Profit Shifting started in 2013, and Action 1 of the 15-point plan of the BEPS project was on the challenges of the digital economy,” Perez-Navarro said. “We did great work in solving the tax challenges in the VAT area, and lots of countries are now collecting VAT that in the past they were not able to collect because of the rapidly changing digitalization of the economy.”
However, one major issue that went unresolved at that time – to the disappointment of some of the OECD’s 34 member countries – was the broader issue of physical presence. The OECD estimates that $240 billion in taxes are lost annually because of multinational corporations exploiting a global tax system that has not kept up with the digitalization of the economy.
The reason that issue was left on the table in 2013, Perez-Navarro said, was that the OECD wanted to gauge the effect of the measures being implemented through the other BEPS Actions at the time before making a recommendation on international taxation.
“At the end of the day, we said, ‘why don’t we wait and see how those measures address the issues that countries are concerned about, and come back to them in 2020.’”
However, there was international clamor for more action. Shortly after the first BEPS Action Final Reports were released, India implemented legislation to try to combat the issue of the digitalization of the economy. When Germany had the G20 presidency in 2017, they pushed for acceleration, requesting that the OECD release an interim report. But the conversation around BEPS ultimately changed due to the new administration in the U.S. and the unexpected passage of major tax reform that substantially reduced the corporate tax rate.
“Now, business models have changed even further,” she said. “We want something that is sustainable and stable. A big part of what we’re trying to do is restore stability and predictability to the international tax system, which is now gone.”
The crux of that issue is establishing a set of laws that will adapt with changing business systems, creating proactive guidelines rather than reacting to changes to the business landscape.
The marketing intangibles proposal, one of three principal proposals represented in the “Unified Approach,” or Pillar One of the OECD’s Secretariat Proposal, “was focused on what other businesses beyond digital have in common,” Perez-Navarro explained. An interaction with consumers’ highly valuable intangibles is one such commonality. Perez-Navarro continued, “If you look at how that might link to the market, it’s the engagement with the consumer.”
That’s why, she said, the OECD has identified consumer-facing corporations as in need of regulation but has not yet defined the technical details of that designation.
To that end, the OECD recently released a Secretariat Proposal on Pillar One that seeks to gauge member consensus on the definition of those large, consumer-facing corporations; it identified companies with €750 million in revenue as a benchmark. The proposal has been put forth to the Task Force on the Digital Economy and the Steering Committee. The OECD held its public meeting on Pillar One in Paris two days after the Tax Leadership Forum.
“So far, the response has been pretty positive,” Perez-Navarro said, referring to the written comments already received on the Pillar One proposal.
However, when it comes to determining the nexus, she explained, other factors would have to be considered.
“China and Luxembourg are not the same size in terms of markets,” Perez-Navarro said. “We wanted to be sure that when you have the profit allocation that companies are also able to benefit. The higher your threshold is on scope, the initial entry point, the less you have to worry about threshold at the nexus point. Assuming we’re at €750 million, we are going to have to have these other factors to look at in terms of determining the nexus.”