Q1/2020 - OECD

OECD/G20 IF Meeting on Digital Tax, Paris, 29 - 30 January 2020

On 29 and 30 January 2020 the 8th meeting of the so-called “OECD/G20 IF on BEPS” took place in Paris. The 137 participating governments reached principal consensus on the architecture of a future global digital tax (Outline of the Architecture of a Unified Approach on Pillar One)[1]. However, the concrete form of the agreement and the degree to which it will be binding are still open.  

The US is pushing for a so-called “safe harbour” mechanism. According to the US proposal, it should be left to the companies themselves to decide whether to submit to the proposed tax regime in exchange for “tax security”. The European states do not accept such voluntary approach. The European Parliament adopted a resolution in December 2019 announcing a unilateral European regulation in case no global solution is in place by the end of 2020.

The European Commission had already drafted an EU directive in 2017 proposing a mechanism how to levy a digital tax. However, the proposal did not find a majority in the European Council. Among those who rejected the draft was Germany, which feared that the US might react with penalty duties on the German car industry. As a result, France unilaterally introduced a national digital tax in 2019, which the US responded to with penalty duties on French wine and cheese. The controversy was put on hold after Presidents Macron and Trump agreed at the G7 Summit in Biarritz in August 2019 to suspend tax and penalty duties until the end of 2020 to buy time for a global solution. Other European countries, such as Italy, Great Britain, but also developing countries, have now also developed concepts for the introduction of a national digital tax.   

No consensus was reached either, when the OECD report was presented at a meeting of the G20 finance ministers in Riyadh on 26 February 2020. The finance ministers of the US and France (see paragraph on G20) heavily disagreed again, as reported in the New York Times on 22 February 2020[2]. Further meetings of the finance ministers until the end of 2020 are planned under both the Saudi G20 presidency and the US G7 presidency. OECD Secretary-General Ángel Gurría has warned on several occasions that a failure to reach an agreement by the end of 2020 would lead to unilateral national and regional solutions, which would have an overall negative impact on the global Internet economy[3].  

The acronym “OECD/G20 IF on BEPS” stands for a working group of the G20 and the OECD that negotiates the creation of an “Inclusive Framework” (IF) for a global digital tax. Almost all members of the World Trade Organization (WTO) are participating in the group. The Paris meeting in January 2020 was attended by 137 countries. The topic has been controversial for years. On 9 October 2019, the OECD had developed a consolidated proposal from the various initiatives and had submitted it for public discussion. The core of the proposal is that multinational companies should be taxed where they generate turnover. So far, the principle has been that taxes are only paid where a company has a “physical presence”. As a result, cross-border data flows have escaped taxation and digital platforms have settled in “tax havens”. De facto, this provides an advantage to the large, primarily US companies such as Google, Facebook, Amazon, Apple and others. The proposal adopted in Paris consists of two parts:

  • Pillar One states that the obligation to pay taxes is not linked to a physical presence of a company in a specific country but to selling digital products or services to consumer in the respective country (consumer-facing business)[4].  
  • Pillar Two shall dry up tax havens and introduce the “tax back” principle[5].  
Mehr zum Thema
Q1/2020OECD
  1. [1] Statement by the OECD/G20 Inclusive Framework on BEPS on the Two-Pillar Approach to Address the Tax Challenges Arising from the Digitalisation of the Economy aAs approved by the OECD/G20 Inclusive Framework on BEPS on 29-30 January 2020, Paris: „ In light of the strong support from the Inclusive Framework on BEPS (IF) members for reaching a multilateral agreement with respect to Pillar One and Pillar Two, and drawing on the technical work of the Working Parties, comments from the public consultation, as well as the discussion at a number of Steering Group meetings, and recognising the concurrent work on a without prejudice basis on the two pillars, members of the Inclusive Framework affirm their commitment to reach an agreement on a consensus-based solution by the end of 2020. In further developing the two Pillars, the Inclusive Framework has therefore agreed upon an outline of the architecture of a Unified Approach on Pillar One as the basis for negotiations and welcomed the progress made on Pillar Two (which follows the outline of Pillar Two in the PoW) contained in Annexes 1 and 2 of this statement. 2. With respect to Pillar One, the IF endorses the Unified Approach (set out in Annex 1) as the basis for the negotiations of a consensus-based solution to be agreed in 2020. The proposed reallocation of taxing rights under Pillar One would require improved tax certainty, including effective and binding dispute prevention and resolution mechanisms. In the design and implementation of the solution, the IF also acknowledges the need to minimise complexity. See: http://www.oecd.org/internet/international-community-renews-commitment-to-multilateral-efforts-to-address-tax-challenges-from-digitalisation-of-the-economy.htm
  2. [2] See: Digital Tax Fight Emerges as Global Economic Threat: European finance ministers, meeting at the G20 in Riyadh, are pushing the United States for a global tax deal as a year-end deadline looms. New York Times, 22 February 2020, In: https://www.nytimes.com/2020/02/22/us/politics/digital-tax-economy-europe-united-states.htm
  3. [3] Remarks by Angel Gurríam OECD Secretary-General, Riyadh, Saudi Arabia, 23 February 2020: „These recent developments move us closer to an agreement on the key policy features of the package, which would in turn, become the basis for a political agreement. The Inclusive Framework also welcomed the progress achieved thus far on the technical design of Pillar Two. Further headway has also been made regarding the OECD’s ongoing economic analysis and impact assessment. The preliminary analysis released on 13 February puts the combined effect of the two-pillar solution under discussion at around USD 100 billion annually. As a share of corporate tax revenues, the revenue gains are broadly similar across high-, middle- and low-income economies. However, the Inclusive Framework also identified several challenges that remain to be resolved with respect to both pillars, notably the proposal to make Pillar One a global “safe harbour” regime. Although concerns were raised by members about this proposal, the Inclusive Framework noted that a final decision on this matter will be taken only after the other elements of the consensus-based solution have been agreed upon. Other elements that need to be resolved include the binding nature and scope of dispute prevention and resolution mechanisms. “Digital differentiation” and regional segmentation also pose certain challenges, as does the continued application of unilateral measures such as digital services taxes. These challenges are surmountable! And the stakes are high. If we fail, tax wars could turn into trade wars, further impacting global growth and investment. Therefore, every effort should be made in the coming months leading to the G20 Finance Ministers and Central Bank Governors Meeting in Jeddah in July to bridge these differences and find solutions. Beyond the hard work to be done by the Inclusive Framework delegates, success will require your personal involvement. We encourage you to do everything in your power to support our path towards consensus.“, in: https://www.oecd.org/about/secretary-general/international-taxation-g20-finance-ministers-and-central-bank-governors-meeting-february-2020.htm
  4. [4] OECD Secretary-General Tax Report to G20 Finance Ministers and Central Bank Governors, Riyadh, Saudi Arabia, February 2020: „The agreed Outline aims to expand the taxing rights of market jurisdictions (which, for some business models, is the jurisdiction where the user is located) over certain defined business activities in the scope in exchange for improved tax certainty. To achieve this result, it creates a new taxing right (“Amount A”), largely unconstrained by physical presence requirements, focusing on large MNEs providing automated digital services and/or selling goods or services to consumers (i.e. consumerfacing businesses). This reallocation recognises that the profits from sustained and remote participation of a business in the economy of a market jurisdiction needs to be taxed in that jurisdiction. The amount of this reallocation of profits would be determined through a formula and based on the consolidated financial accounts of MNE groups, with no connection to the current transfer pricing principles“. In: http://www.oecd.org/g20/topics/international-taxation/publicationsdocuments/
  5. [5] OECD Secretary-General Tax Report to G20 Finance Ministers and Central Bank Governors, Riyadh, Saudi Arabia, February 2020: „Pillar Two (also referred as the Global Anti-Base Erosion proposal or “GLoBE” proposal) focuses on the remaining BEPS risks and seeks to develop rules that would provide jurisdictions with a right to “tax back” where other jurisdictions have not exercised their primary taxing rights or the payment is otherwise subject to low levels of effective taxation. The Programme of Work, provides that the GloBE proposal be composed of four rules: a) the income inclusion rule; b) the switch-over rule; c) the undertaxed payment rule; and d) the subject to tax rule. In: http://www.oecd.org/g20/topics/international-taxation/publicationsdocuments/