KPMG comments on the OECD’s $140bn digital tax proposals
The OECD has released important information on its work to find international consensus on how to deal with the tax challenges of the digitalisation of the economy.
There are blueprints for each of the two ‘Pillars’ of its proposed Inclusive Framework (IF) solution. Pillar 1 looks at the allocation of taxing rights between the countries in which a multinational enterprise (“MNE”) engages in economic activity. Pillar 2 looks at how a global minimum tax rate could apply to an MNE (subject to existing country-by-country tax reporting obligations). A third document is the OECD’s estimate of the economic impact of implementing the measures set out in the blueprint reports. This document is important for putting the proposals in perspective.
For Pillar 1, the OECD estimates that taxing rights over US$100 billion of profits would be re-distributed annually if the blueprint was enacted. That would mean US$20 billion in tax being re-allocated among more than 130 countries. The tax dollars involved may not change the world, but there may be much greater value for national governments, and for the global economy, in achieving public acceptance that MNEs are contributing appropriately to national revenues. Achieving consensus on a multilateral solution may allow countries such as the UK, France and Italy, which have implemented unilateral measures (such as revenue-based digital services taxes) to repeal them and could dissuade others from going down a unilateral path.
For Pillar 2, the OECD’s estimate is that this will increase annual global corporate income tax (“CIT”) collections by up to US$100 billion, or four percent. This includes the impact of the US’ global intangible low-taxed income (“GILTI”) regime and assumes that GILTI will be accepted by other IF members as a valid component of the Pillar 2 solution. The OECD expects that low-, medium- and high-income countries will on average all see an increase in CIT collections of between one percent and four percent. In dollar terms, this is sure to mean that high-income countries would receive a considerably greater average share of this US$100 billion jackpot than low-income countries.
The Pillar 1 blueprint report envisages that the natural resources and financial services industries would be excluded from Pillar 1. This would cushion the impact on Australian government revenues. The impact of Pillar 2 on Australian-headquartered MNEs would be moderated by the fact that Australia already has a sophisticated controlled foreign company (“CFC”) attribution regime. The CFC regime ensures that profits in offshore low-taxed subsidiaries are also taxed in Australia, unless they meet certain narrow exemptions. Australia also has a relatively high headline CIT rate for a developed country.
The IF describes both blueprint reports as “a solid basis for future agreement”. There is much still to be done on reaching political agreement on certain Pillar 1 issues such as the scope of industries to be included, the extent of the profits that may be re-allocated, and whether Pillar 1 as a whole should be mandatory or operate as a safe harbour. Political agreement on Pillar 2 appears closer, but plenty of details remain to be hammered out. The G20 finance ministers, who meet later this week, are expected to approve the blueprint reports. This will pave the way for further negotiations to occur, with the OECD having the goal of achieving consensus by mid-2021.
The IF member countries have invested a huge amount of time, resources and brainpower in getting to this point. The two blueprints must have some reasonable chance of forming a basis for multilateral agreement, otherwise it is hard to believe the IF would have resolved to publish them. What is needed now is the political will to get this done.