Kim Jarrett and Nadia Fediaeva share their thoughts on the latest proposal by the OECD to nudge tax into the modern era.
The principles underpinning our current international tax rules, which allocate taxing rights over a company’s global profits, date back over 100 years. They are about as compatible with digital business models as dinosaurs with smartphones.
As part of the ongoing effort to nudge the tax world into the modern era, the tax officials at the Organisation for Economic Co-operation and Development (OECD) have released their latest proposal to address the tax challenges stemming from the digitalisation of the economy and globalisation.
It lays the platform for further discussion and negotiation by more than 130 countries that are part of the OECD’s Inclusive Framework on Base Erosion and Profit Shifting, early next year, to reach an agreed way forward by the end of 2020.
The proposal aims to answer the question that has been puzzling tax administrators, Governments and multinational businesses for years now: What is a fair and appropriate basis for allocating global profits in the modern, increasingly digital, business environment, when physical presence in a country (the traditional profit allocation basis for tax) is no longer relevant for many businesses?
The key components of this latest proposal are all subject to considerable further development, consultation and negotiation, but if a way forward is agreed, will result in material changes to how global profits are split and taxed between countries.
Although simple on the surface, as one delves deeper, the complexities become apparent. Modern business models are complex, varied and multi-layered. The challenges with definitions and thresholds alone are numerous, and questions around what to do with loss making groups, or companies with multiple business lines with different profiles, will need to be addressed.
For New Zealand, the exclusion of our primary industries (commodities) from the scope of these rules may well determine whether “NZ Inc” is a net fiscal winner or loser from the changes.
This is incredibly important work and the political drivers for change are strong, with civil society concerns about multinationals not paying their ‘fair share’ of tax and frustration around the time being taken for reform.
A successful outcome, however, depends finding a final set of rules which are satisfactory for 134 countries, each with different economic and political drivers. There will necessarily be “winners” and “losers”. It makes an orderly Brexit seem easy.
However, failure to reach agreement could undermine the credibility of the OECD and multilateral approaches to addressing global issues. It will encourage more countries to enact local tax measures. Ultimately, this could result in large-scale double taxation for multinationals and huge complexity in, and barriers to, international trade.
With the stakes high, and the subject matter hugely complex, progress is going to require compromise on all sides. This is likely to be the tax battle of our generation.