“(Other nations) had all come together” via the OECD to “screw America and that’s just not something we’re ever going to be a part of”.~ US Trade Representative Robert Lighthizer addressing Congress, 17 June 2020, per Sydney Morning Herald.
Boom. The US has blown up ‘BEPS 2.0’, the OECD’s tax reform process with the Financial Times reporting that US Treasury Secretary Steve Mnuchin has written to four European finance ministers to say that the US was “unable to agree even on an interim basis changes to global taxation law that would affect leading US digital companies.”
US Trade Representative Robert Lighthizer told the US Ways and Means Committee, in response to a question about the letter, that the intention was to block any further progress at the OECD. “We were making no headway and [Mnuchin] made the decision that rather than have them go off on their own, you would just say we’re no longer involved in the negotiations.”
The finance ministers of France, Italy, Spain and the UK responded to the letter – per Belgium’s Le Soir – to say that “the positions and proposals of the United States have always been respected and taken into account”. Although they couldn’t resist a little dig, noting that this included an important US proposal that had never been “fully explained“.
The Trump administration then added the now-traditional confusion, with Treasury spokesperson Monica Crowley tweeting a one-line statement that contradicted Lighthizer on both the nature of the US decision and the reason for it: “The United States has suggested a pause in the OECD talks on international taxation while governments around the world focus on responding to the COVID-19 pandemic and safely reopening their economies.” (Italics added.)
The OECD hit back with its own statement, not from the tax team but directly from the Secretary-General Angel Gurría. His threat was clear: “Absent a multilateral solution, more countries will take unilateral measures and those that have them already may no longer continue to hold them back. This, in turn, would trigger tax disputes and, inevitably, heightened trade tensions. A trade war, especially at this point in time, where the world economy is going through a historical downturn, would hurt the economy, jobs and confidence even further.”
A strong response, effectively arguing the US is irresponsible to undermine talks. But in truth, the process was already in disarray, with the non-OECD members of the Inclusive Framework – that is, the lower-income countries that have typically been rule-takers as far as the OECD is concerned – openly calling out the institution’s failure to take meaningful account of their views. More than that, the OECD had already abandoned – at the behest of the US – most of the original ambition. While still paying lip service to the pledge to go ‘beyond the arm’s length principle’, the secretariat had tried to impose a US-French deal that did little of this at best.
Our research with the Independent Commission for the Reform of International Corporate Taxation (ICRICT) showed that the OECD proposal would have moved few of the profits declared in tax havens back to the countries where the real economic activity takes place; and would have primarily benefited a few OECD members, including the US, over all others. (Incidentally, we published the full model and the full dataset; sadly, the OECD has still to publish their data or any replicable model, providing only top line numbers that are hard to square with any others).
Digital services taxes? No thanks
Again, what next? The obvious outcome is that a whole slew of countries will now introduce their own digital services taxes (DSTs), to claim some revenues from these major tax-avoiding multinationals. No bad thing, you might think, and perhaps a small step to reduce tax injustice…
But: Digital services taxes are bad taxes. There, I said it. They don’t deal with profit shifting. They don’t ensure a level playing field between businesses (quite the opposite). They don’t address the global inequalities in taxing rights between countries. Digital services taxes don’t address the issue of unearned rents in the pandemic. And they don’t build towards the broader reforms of corporate tax that are now urgently needed (again, quite the opposite).
What do digital services taxes do? They may raise some – typically small – amounts of additional revenue, at a time when it is much needed. They may reduce the effective policy bias to a sector that has been particularly aggressive in its tax dodging. OK. Digital services taxes allow governments to respond to public pressure to do something about tax dodging – without actually doing very much.
The threat of countries going their own way on this added pressure for some international progress at the OECD, but that’s done now. And the threat of digital services taxes certainly did nothing to prevent good proposals like that of the G24 being ditched in favour of the limited, highly complex alternative negotiated bilaterally by the US and France (until the US today threw its toys out of the pram).
Priorities for countries
The ideas that drove the original optimism around BEPS 2.0 have not gone away. And nor, despite the pandemic, has the systemic tax abuse of multinational companies or the role of their advisers at the big four accounting firms. There is an urgent need for reform – and revenue. If countries are to take unilateral action, here are three options – all ultimately consistent with the broader reforms needed:
1. Countries should introduce excess profits taxes. These will allow states to capture a share of the large unearned profits of those companies that are benefiting from the massive state intervention of lockdowns, while all others suffer. But these must be based not on the declared local profits of multinationals, but on a fair share of their global profits. Take the global profits above, say, a 5% return; then apportion to the country a share in line with their share of the multinational’s global sales and staff. The country can then tax these exceptional, unearned, locally generated profits, at a rate of say 75%-95%.
[If all countries do this, there is no double taxation and the multinationals even get to keep a bit of their unearned profits. Not bad for a pandemic when so many are losing so much, so let’s not take any complaints too seriously.]
2. Countries can introduce formulary alternative minimum taxes. Leave the OECD’s failed rules in place for now, awaiting some global negotiation, but draw a line on the extent to which profits can be shifted. If the declared profits after transfer pricing, thin capitalisation and all the other manipulations end up being less than, say, 80% of the country’s fair share of the global profits under a unitary tax approach, the tax authority should simply draw a line there and claim that as the minimum tax base.
[Again, this approach will not lead to double taxation unless other countries are taxing far more than their share – in which case multinationals should be encouraged to address any complaints there instead.]
3. Countries could move unilaterally to a full unitary and formulary approach. There’s no reason, in fact, not to just go the whole way. There’s no need for global agreement, and no reason for this to cause double taxation unless, again, other states are taxing more than their fair share.
Whichever path countries or regional blocs like the EU choose, they should ensure that multinationals are required to publish their country by country reporting. This will confirm to the world that the country is not taxing more than its fair share; and reveal if other countries are continuing to procure profit shifting. And of course, country by country reporting shows the public which multinationals – and which tax advisers – are most aggressively flaunting their social responsibilities to pay tax fairly, like the rest of us. What’s not to like?
Where now for the OECD?
At one level, the OECD faces a simple choice. While it has said that the show must go on, there is presumably a more thoughtful process happening behind closed doors. They could opt to complete the exercise, in the hope that Trump will be replaced and a new administration willing to get on board with the outcome will be along shortly. But this would be an EU deal, with few other countries able or willing to engage fully during the pandemic, and OECD members unwilling to cede real power. And in any case, how likely is it that global corporate tax reform would head the action list of an incoming Biden administration facing a twin crisis of corruption and COVID?
Would the EU want to bother, or instead push ahead itself and finally bring in the Common Consolidated Corporate Tax Base (CCCTB) – ideally on a full unitary basis? It’s hard to see how the OECD could regain any credibility with the Inclusive Framework after putting a red line through their work programme at the behest of the US, so the only argument would have to be ‘come on back, the big bully has gone’. Tricky, although it could perhaps work a bit if the EU was willing to see a more ambitious outcome internationally – something closer to the Common Consolidated Corporate Tax Base for all. But given the EU’s difficulties in dealing with its own tax havens, no one should hold their breath.
Alternatively, the OECD could do what we asked them to do a few months ago: accept that this process is toast, and unconscionably unfair to non-OECD members, and abandon it. It should be painfully clear to all that the negotiation of international tax rules is political, not technical; and the OECD’s legitimacy, such as it is, is technical and not political. This is not the right forum.
The OECD’s future role on tax could be in providing technical support to its members in a global tax negotiation. That negotiation must be at the UN – not because it is perfect, but because that is what it is for: to provide a forum for global political negotiations. The OECD has recently inveigled its way into UN processes, seeking a role to guide some kind of ‘BEPS 3’ for lower-income countries. This too is clearly illegitimate; but hints perhaps at a technical role on the fringes of a political process.
There are many good people working at the OECD to make international tax better. But the organisation has confirmed once again, for what should be the very last time, that it is a members’ club only and cannot be trusted to run a genuinely inclusive process.
Where now for the excluded of the ‘Inclusive Framework’?
It is not coincidental, of course, that OECD members are primarily countries that have had empires and/or are ‘settler nations’ – while those in the ‘Inclusive Framework’ are primarily the colonised, the ‘settled’. If ever there was a time to leave this behind, it’s now.
Three options stand out.
1. The possibility of meaningful, regionally led reforms. A combination of the technical group and the political (the African Tax Administration Forum working with the African Union, say); or a technical group working with a regional power (CIAT, the Inter-American Center of Tax Administrations, with Argentina, perhaps).
2. The UN might finally take on its role as the global forum for the global negotiations over global taxing rights that must, eventually, come to pass. A critical decision facing the high-level UN Panel on Financial Accountability, Transparency and Integrity (FACTI), when it reports in January 2021, is whether to put its full backing to the proposal for a UN tax convention. Such an instrument is intended to deliver fully multilateral commitments to tax transparency measures, and at the same time to establish the forum for such negotiations.
OECD members have already indicated their opposition, following their longstanding blocking of a meaningful role on tax for the UN. If the OECD is a busted flush, even this could perhaps shift; but for now, the third option may be the best bet:
3. This would be process-led by the G24 or G77 groups. The idea would not be to move immediately to a formal, global negotiation. Instead, the groups could convene an open discussion among states, with strong technical support, to allow exploration of the options and likely revenue and broader economic impacts. In effect, the idea would be to convene the sort of process that the Inclusive Framework had set out in its work plan, but with genuinely open participation.
This would allow the potential for consensus to emerge over time, but also provide technical support for countries taking more immediate measures – of the sort described above, for example – in the face of the pandemic and other revenue pressures. The Tax Justice Network stands ready to assist with technical support to any such process, as undoubtedly would the wider global tax justice movement.