Plans for taxation of the digitalised economy are progressing, but the complex detail is imposing a difficult hurdle.
The Pillar One and Pillar Two ‘Blueprints’ for the international taxation of the digitalised economy have drawn widespread interest. There is overwhelming support for the OECD’s drive to reach international consensus and a prompt solution. Business models are evolving away from physical presence-based trading and there is recognition that the tax system needs to be modernised in order to keep up. The watchwords are ‘urgency’, ‘fairness’ and ‘multilateralism’. Unfortunately, there is also overwhelming agreement that the problem that Pillar One is trying to address is not clearly defined. The resulting complexity may itself threaten the proposals’ success. If the Inclusive Framework is unable to address the concerns while satisfying all stakeholders, respondents see a risk that businesses will face onerous compliance burdens, poor public engagement, international tax disputes and double taxation. In some cases, the concern is that the compliance requirements could render the plans unworkable.
Complexity concerns are most pronounced in relation to Pillar One. Businesses’ responses have set out many challenges in connection with financial tracking, data availability, reliability and privacy. The limitations of information and accounting systems may make it problematic to comply with the current proposals.
Tax policy challenges also arise: the target categories of ’Automated Digital Services’ and ‘Consumer Facing Businesses’, although much debated, have been identified as potentially market-distorting and controversial at category margins. At the same time, the plans to exclude small or low-risk taxpayers are arguably insufficient to act as a helpful simplification measure.
The double taxation relief proposals were described by respondents as unsuitable for decentralised business models and probably ineffective without mandatory binding dispute resolution.
Naturally, with many stakeholders come many points of view, but this can mean focus on a clear objective is diminished: probably a significant contributor to the proposals’ complexity. Substantial reworking may be required before agreement can be achieved.
The global minimum taxation principles underlying Pillar Two are broadly supported but, as with Pillar One, the level of complexity poses difficulties for affected groups. Although agreement on Pillar Two remains closer than for Pillar One, addressing these challenges will be no easy task.
Many respondents recognise that a balance will need to be struck between complexity, accuracy and ease of administration. Respondents expect a pragmatic approach to be applied. In particular, where there is a clear expectation that no additional tax will be due under Pillar Two (or additional tax would arise only due to timing differences) there is consensus that the compliance burden should be minimised. Maximum use of existing systems is recommended, with action focused on significant tax risks.
It is also significant that there is widespread support for using consolidated financial accounts to compute the global anti-base erosion (GloBE) tax base, and for using deferred tax accounting to this end. This approach has already been rejected by the OECD in reaching the current proposals. The integration of the US global intangible low tax income (GILTI) rules and the hoped-for engagement of the new US Administration were broadly welcomed although it remains to be seen how the Biden administration will approach negotiations.
Finance ministers from developed and developing countries, spurred on by voters’ concerns over fairness, have agreed that matters are urgent as the absence of an effective multilateral solution is likely to result in a web of inefficient unilateral measures. At stake is not just tax alone: if agreement here cannot be reached, ministers see a threat to public confidence that rules-based international co-operation can fairly advance the interests of diverse countries. Ministers have reiterated their determination to succeed and indeed this determination will be sorely needed.
The Inclusive Framework has welcomed the sustained engagement of many diverse parties and much progress has been made but some very difficult questions remain and time is running out.
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