Before COVID-19, the OECD’s Inclusive Framework seemed to be on track to achieve consensus on a global approach to taxing the digital economy. In a 31 January, 2020 statement, the Inclusive Framework affirmed its commitment to achieve this consensus by the end of this year.
That statement proposed a unified approach to taxing profits from digital business activity based on two pillars:
- Pillar 1 aimed to define a new taxing right that would allocate additional revenue to market jurisdictions for certain types of goods and services, especially automated digital services and consumer-facing businesses and activities.
- Pillar 2 would introduce a global minimum tax that all jurisdictions would adopt, along with rules to prevent base-erosion payments through other tax rules or mechanisms.
Plenty of work remains to flesh out these approaches and gain agreement on the details, however. In December 2019, the U.S. government sent a letter to the OECD supporting BEPS 2.0 in general but suggesting that the U.S. would reject a mandatory departure from the arm’s length standard, as contemplated under Pillar 1, in favour of a safe harbor approach. Many Inclusive Framework members believe that the U.S. approach could raise major difficulties, increase uncertainty and fail to meet policy objectives of the overall process. Resolving this issue will be crucial for the project’s success.
The OECD’s January statement acknowledges these concerns and identifies other areas where achieving consensus may be difficult. These include:
- whether dispute resolution prevention and resolution mechanisms should be binding
- the degree of digitalization for determining activities in scope
- whether the final proposal would be strong enough to discourage jurisdictions from imposing or adopting digital services taxes unilaterally.
Despite these challenges, Inclusive Framework members remained committed to finding mutually agreeable solutions.
After COVID-19 emerged, however, questions arose over whether the OECD could meet its original timetable — and whether it was even appropriate in these times for policy makers to devote attention to BEPS 2.0 at the expense of other matters.
Many believe the current environment actually makes the project even more urgent. The longer global consensus remains elusive, the higher the risk that even more jurisdictions will impose unilateral digital services taxes, especially as economies recover and ever more consumer and business activity moves into the digital domain. Without progress on BEPS 2.0, jurisdictions that are holding off in this area might move ahead with their own forms of digital taxation. Others could respond with increasing protectionism and trade retaliation, to the detriment of recovering economies.
With global consensus on BEPS 2.0 widely seen as the way to rein in unilateral action and prevent further splintering of international tax policy, the stakes are high. In March, statements from each of the OECD, G-20 and G-7 reiterated their commitment to addressing the digital economy’s tax challenges. Inclusive Framework members are redoubling efforts to complete the project through virtual meetings and remote work mechanisms. A revised timetable calls for political consensus among Inclusive Framework countries on final proposals in time for the October 2020 G-20 meetings. Implementation could begin as early as 2021.