After decades of operating within a generally stable
international tax regime, multinational companies have had to acquaint
themselves with a flurry of new acronyms and rules in the past several years. In
2015, efforts by regulators got underway to reduce BEPS, or base erosion and profit
shifting. US tax law changes in 2017 introduced GILTI to address global intangible
low-taxed income and the BEAT, a base erosion and anti-abuse tax.
The acronym that those in the boardroom should be
familiar with now? OECD.
The Organisation for Economic Co-operation and
Development is hosting an ambitious project consisting of 130-plus nations
attempting to revise the international tax architecture to account for the ways
in which the digitalized economy has blurred traditional lines of jurisdiction.
Whether consensus can be reached—and, in particular, whether it can be reached
by the target of year-end 2020 by countries with vastly different priorities,
politics, and domestic industries—remains to be seen. But there may be
significant risk to those entities ignoring this project.
Why should boards be concerned? The OECD project has
the potential to significantly impact a company’s risk profile and strategic
planning, two of the key areas of board oversight. Accordingly, directors
should stay informed about the status of the project and how it might impact
the companies they serve.
At its core, the multilateral effort—which also has a
mandate from the finance ministers of the G20—seeks to write new rules that reallocate
some portion of companies’ profits to the market jurisdictions where they have
sales and/or users, but not necessarily a physical presence. The revisions seek
to take into account the fact that physical presence is no longer required for
entities to profit from a jurisdiction (what the OECD has dubbed Pillar 1 of
the project), and to ensure that profitable companies are paying some minimal
level of tax (Pillar 2).
In the project’s earliest stages, a cohort of key
countries, led by France, had their sights set on a relatively small group of digital
giants—just about all of which are headquartered in the US. After the US made it
clear that it would not sign on to an effort targeting only its own high-profile,
high-tech companies, the countries engaged have generally conceded that any new
regime will need to apply more broadly. The work being done is now looking not
just at highly digital business models but also at other large, high-profit multinationals
that benefit from marketing intangibles.
It’s not clear that there has been significant progress made towards a consensus design, but in early October the OECD staff released a proposed “unified approach” to Pillar 1. This proposal is an attempt to move the ball forward, and it gives companies and business organizations the opportunity to provide input on both the overarching design of new rules and the myriad details that will be critical to the impact on any individual company.
Should a group’s profits be looked at on a global
basis? By business line? By region? Should there be size thresholds? Exempt
sectors? While the proposal seeks to reallocate to markets a company’s operating
margin in excess of a formulaic “routine return,” it is not yet agreed what
constitutes a “routine return” and whether it should differ from industry to
industry. How much of the residual return should taxing jurisdictions get? And the
questions go on, and on.
This project is a political one as much as a technical
one, and the government participants have acknowledged the implementation
challenges that lie ahead even if consensus on the details is reached. However,
with many countries anxious to stake a claim to profits beyond their
traditional reach, the only greater risk for multinationals than a new global
agreement may be the failure to reach
a new global agreement. One need look no further than France, which implemented
a digital services tax (DST) this summer, to foresee the challenging landscape
that dozens (or more) of similar but uncoordinated unilateral measures may create
Because the project has the potential to change
international tax rules well into the future, directors are strongly advised to
learn and understand how the proposals could affect their company’s bottom line
and strategic decisions. There is a great deal of engagement by the business
community, with both their respective governments and the OECD itself. How is
your company engaged?
Bob Stack is a managing director in the international tax group of Deloitte LLP’s Washington National Tax practice. Storme Sixeas is a senior tax policy manager in Deloitte LLP’s Washington National Tax practice.
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