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A Seat at the Table: Thought Leaders Discuss OECD's Plans on Digital

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A Seat at the Table: Thought Leaders Discuss OECD's Plans on Digital taxnotes federal Volume 167, Number 11 ■ June 15, 2020 A Seat at the Table: Thought Leaders Discuss OECD’s Plans on Digital Economy Taxation by Peter A. Barnes, H. David Rosenbloom, Steven D. Felgran, Ara Stepanyan, Helen Hecht, Richard D. Pomp, Rick Minor, and Aleksandra Bal Reprinted from Tax Notes Federal, June 15, 2020, p. 1901 For more Tax Notes content, please visit www.taxnotes.com. © 2020 Tax Analysts. All rights reserved. Analysts does not claim copyright in any public domain or third party content. GLOBAL ROUNDTABLE tax notes federal A Seat at the Table: Thought Leaders Discuss OECD’s Plans on Digital Economy Taxation by Peter A. Barnes, H. David Rosenbloom, Steven D. Felgran, Ara Stepanyan, Helen Hecht, Richard D. Pomp, Rick Minor, and Aleksandra Bal OECD Pillar 1: It’s an A for Effort, But We Need Global Roundtable is a regular series Plan B appearing in Tax Notes Federal, Tax Notes State, and Tax Notes International that brings together experts from each discipline to help advance the discussion of tax issues. In the first installment, the authors discuss whether the OECD — in light of the universal disruption caused by the COVID-19 pandemic — should release its recommendations for taxing the digital economy this year. If it does, will state, federal, and international governments be prepared to act? If it does not, what steps can or should those governments take? This article is intended for general information purposes only and does not and is not intended to constitute legal advice. The Peter A. Barnes is of counsel with Caplin & reader should consult with legal counsel to Drysdale Chtd. in Washington and a senior fellow at determine how laws or decisions discussed the Duke Center for International Development at herein apply to the reader’s specific Duke University. H. David Rosenbloom is a member circumstances. with Caplin & Drysdale in Washington, director of the Copyright 2020 Peter A. Barnes et al. international tax program at New York University All rights reserved. School of Law, and a member of Tax Analysts’ board of directors. Thomas Edison famously never failed in experiments to develop the lightbulb; he just discovered 10,000 prototypes that did not work. That same unstoppable attitude underlies the OECD’s effort to achieve a global consensus on an income tax for large digital and consumer-facing companies. This would necessarily include a means of collecting revenue from the new tax, and an allocation of the revenue among 100-plus countries regardless of whether the companies have a taxable presence in the countries where they find markets. TAX NOTES FEDERAL, JUNE 15, 2020 1901 For more Tax Notes® Federal content, please visit www.taxnotes.com. GLOBAL ROUNDTABLE © 2020 Tax Analysts. All rights reserved. Analysts does not claim copyright in any public domain or third party content. So should the OECD continue its push, above a threshold much lower than €750 notwithstanding the COVID-19 pandemic and the million? resulting economic and political turmoil? • Using financial accounting data may be the Absolutely! The sooner the OECD unveils its only path forward, but what to do about proposal, the sooner we can all analyze it and obvious compliance and comparability consider alternatives that might more successfully issues? light the night. • How to divide the revenue allocable to The current work of the OECD absorbs all the market countries among those countries? oxygen in the international tax world, so there is • Who administers this system? Who no room to discuss other ways in which market conducts audits? countries can sensibly raise additional tax The list of concerns goes on, and most of the revenue from international transactions. issues are now well known. But until the OECD Countries aggrieved by “foreign” (that is, U.S.) puts forward its final proposal, we can all pretend multinational tech giants are waiting, impatiently, that some genius — a tax equivalent of Edison — for the OECD proposal, which those countries will find a solution. believe will allow them to grab revenue from Once the OECD releases its proposal, we nonresidents and plug holes in their national believe the international tax world will fracture budgets. International organizations, such as the into three groups. One group of countries will G-20 and the EU, are likewise waiting on the immediately pass legislation to adopt the OECD OECD to unveil its consensus proposal. approach; the legislation will simply impose tax We do not believe that the OECD effort is a in accordance with what the OECD has failure. Just as Edison’s tinkering was a necessary suggested. Those countries will then sit and wait step toward the incandescent lightbulb, the and hope the tax revenue rolls in. OECD’s pillar 1 is necessary to show the many Another group of countries, probably led by choices, compromises, and assumptions that the United States but not limited to the United would be needed to impose a new and States, will recoil. The thorny issues so evident to supplemental income tax system for a select few any tax professional will make administration of taxpayers. The sooner the OECD puts its proposal the new rules problematic. Those countries will on the table, the sooner those choices, urge patience by all countries until further compromises, and assumptions will be subject to discussion can refine and adjust the OECD public scrutiny — and the sooner the debate can proposal. move to firmer ground. A third and final group will remain silent. We have previously expressed our concerns Some of those countries have adopted interim regarding the current version of the OECD measures and will seek to collect tax revenue that proposal. To highlight a few points: way. Other countries in that group will decide to • Why digital companies? How to define adopt their own interim measures. A few those companies when virtually every countries will defer action until a path forward is business is now a digital business? clearer. • Why consumer-facing companies? We find it perfectly sensible for market Business-to-business enterprises are equally countries to seek to collect additional tax revenue dependent on reputation and customer from international business. The interim feedback. measures do this, albeit with no consensus on tax • How to define consumer-facing companies? rates or technical details. Regrettably, there is no The OECD has already boxed itself into room for discussing technical details of the something of a corner by saying it will interim measures while the OECD’s global exclude some industries. income tax approach is pending. • Why a revenue threshold, such as €750 If the OECD can finalize its proposal by the million in annual revenue? If the new rules end of 2020, tax professionals can spend 2021 are sensible, should they not apply to digesting its complexities and, we hope, moving everyone, or at least every multinational toward a better approach. We think that better 1902 TAX NOTES FEDERAL, JUNE 15, 2020 For more Tax Notes® Federal content, please visit www.taxnotes.com. GLOBAL ROUNDTABLE © 2020 Tax Analysts. All rights reserved. Analysts does not claim copyright in any public domain or third party content. approach will likely resemble the interim “Only a crisis . produces real change. When measures that the EU has endorsed and that many that crisis occurs, the actions that are taken countries have already adopted. depend on the ideas that are lying around.” Everything we have written here regarding — Milton Friedman international consequences of the OECD’s We support the OECD’s plan to update the proposal applies equally to state taxation of global profit-sharing rules to allocate a portion of digital businesses (and other businesses) within multinational enterprise group profit and related the United States. There is no need to create a new, taxing rights to the so-called market countries. parallel income tax system and apply it to a few However, in our opinion it would be unwise to large companies. After South Dakota v. Wayfair attempt to release recommendations in the face of Inc., states can collect consumption taxes — sales this year’s pandemic-induced recession. Further, taxes or use taxes — on sales to residents by most we believe that a much more fundamental nonresident businesses. The nexus rules for revision of the global tax and transfer pricing imposing income tax on nonresident businesses system is required that transcends the digital can be complicated, but almost all large economy. businesses with a national customer base already Should the OECD release its pay income tax in every state that imposes such a recommendations for taxing the digital economy tax. States already have the tools to collect this year, it is highly unlikely that governments whatever level of tax they want from interstate would be prepared to act on them. It seems business as well as intrastate business. considerably more likely that the standout success If the OECD proposal fails to achieve global of some tech companies in the current crisis might consensus, as we expect, another quote from encourage more governments to initiate digital Edison may apply: “Our greatest weakness lies in services taxes to help fill their massive fiscal holes. giving up. The most certain way to succeed is Such unilateral government actions might always to try just one more time.” We hope the temporarily harm the OECD’s efforts at tax reform next try discards the notion of a new global and require additional negotiations to reverse income tax and embraces an effort to harmonize down the road. gross-basis taxes such as those found among the Nevertheless, our message to the OECD is to interim measures. slow down, to not ring-fence the digital economy, A Sweeping Revision of Global Profit-Sharing but to take advantage of the lessons being learned Rules Is Needed from the crisis and reevaluate how best to fully achieve the goals of the base erosion and profit- shifting project.
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