The Organisation for Economic Co-operation and Development (OECD) indicated in its Tax Talks held on 4 May 2020 that an agreement on the key policy features of its work to address the digitalization of the economy (BEPS 2.0) is only expected at the earliest in October 2020. While the OECD mentioned in its statement of 17 March 2020 that the Secretariat Team is “working full steam” to arrive at a decision on the key features at the BEPS plenary meeting scheduled this July in Germany, the expectations to shortly arrive at a consensus-based solution are now tempered. The Inclusive Framework meeting and the G20 Finance Ministers meeting are now both scheduled to take place in October 2020. Nevertheless, an Annual Progress Report on BEPS is still expected to be published in July 2020. At the same time, the OECD stresses the importance of tax and tax policy measures in supporting economic recovery after COVID-19, but indicates also that the short term solutions should be in line with the long term goals and tax reforms, such as, for example carbon taxation and base broadening.
Separately in the OECD’s statement of 15 April 2020 in response to the COVID-19 crisis, the OECD mentions that it would become even more important to arrive at a consensus on Pillar 1 issues with the increased use of digital services. Pillar 1 aims to arrive at a unified approach on the new nexus rules (and taxing rights) in a digitalizing world, as well as new profit allocation rules that go beyond the traditional arm’s length principle. Furthermore, the OECD emphasizes the need and the importance of ensuring that multinationals pay a minimum level of tax in a post-crisis environment – as set out under Pillar 2. While it is mentioned that there has been good technical progress on Pillar 2, we also understand that the Pillar 1 proposals have been subject to challenges – particularly raised by the US and China.
Given that the COVID-19 crisis is causing disruptions in production, supply chains and sales, the profitability of multinational groups is likely to come under pressure. Consequently, the economic slowdown is also expected to necessitate a review of how transfer pricing policies of multinational groups may need to be adjusted in these times.
There are also multinational groups benefiting from the COVID-19 situation as their services are bolstered through an exponential increase in demand. It is important to consider if the new profit allocation rules will appropriately attribute these increased profits, by considering whether the profit growth was a result of the efforts of the local markets, or of the central strategic decisions and intellectual property rights.
The OECD continues to aim for international consensus on the proposed changes to the international taxation system while countries fight the pandemic and its economic ramifications. At the same time, a growing number of unilateral measures have been introduced by several countries, putting pressure on the OECD’s anticipated multilateral solution. Countries including Turkey, India and Indonesia have followed France, Italy, and others in enacting national legislation to tax digital companies. This trend may be accelerated by the foreseen economic fallout as a result of the ongoing crisis.
The OECD emphasizes that tax cooperation should remain priority, to avoid overlapping national measures triggering international disputes which would harm economic recovery. With the crisis outlook being so volatile, we can only be hopeful that the OECD’s proposals around BEPS 2.0 materialize without creating more challenges for companies and governments alike in these uncertain times.