WEF 2020 - there is no 'Plan B' if time runs out on a global deal on digital services taxation, admits OECD

On the vexed question of where multi-national organization should pay tax in a digital economy, all eyes are now on the Organisation for Economic Co-operation and Development (OECD) and its efforts to come up with a global solution by the end of this year.

This week at the World Economic Forum gathering in Davos, France postponed enforcement of its unilateral national Digital Services Tax under pressure from the White House, while the UK’s plans to kick off its own version attracted threats of punitive tariff retaliation from US Treasury Secretary Steven Mnuchin.

For its part, the UK insists it will proceed as planned despite the potential impact on its ambitions to strike a post-Brexit trade deal with Washington. The UK’s International Trade Secretary Liz Truss struck a defiant note today:

Let me be absolutely clear. UK tax policy is a matter for the UK Chancellor. It’s not a matter for the US, it’s not a matter for the EU, it’s not a matter for anybody else, and we will make the decisions that are right for Britain, whether it is on our regulatory standards, whether it’s on our tax policy, or whether it is on anything else.

But the best solution, agrees every party, would be an international agreement that all countries can sign up to. That however is clearly easier said than done. The last, best hope now is the OECD’s work on the problem. At Davos earlier today,  Angel Gurría, OECD Secretary-General, provided an update on progress, beginning from the premise that the number of countries engaged with the debate is actually beneficial:

This is a plan where 137 countries are involved, which means that the ownership and the source of the ideas and the initiatives is from the countries themselves. It’s not just the OECD putting forth a proposal to be discussed. Although the issue has been on the table for quite a while, the world had not organised itself around a few of the concepts that are fundamental here in order to address them. The question of digitalisation of the world economy is happening more and more and more every day. This is not about digital companies. Please, let’s be clear. This is not about the companies of any one particular country. This is about the process of digitalisation where, if you’re a finance minister, you see the base shrinking because digital is all over the place and happening more and more and more.

The question is, how do you address a new set of rules? How do you establish new rules of the game to deal with this new reality? Before, for example, one of the rules was that you had to have a physical presence in a market. Right now, you can be anywhere in the world and doing billions and billions in business in a particular location, in a particular country or a particular city and you’ve never even stood there. We used to have things like transfer payments and you used to have arms length principles and things like that which were applied to what I’d call the more traditional type of economy. The new economy, the digital economy, requires that we establish new rules in order to avoid hundreds of billions of dollars being not paid or divested or simply ignored and legally because companies are simply seeking to pay where they have the lowest tax jurisdiction.

Gurria emphasised that this has been work that’s gone on for some time and not a reaction to the public fireworks of this week between the US, France and the UK: 

We are on track. This is not something that started yesterday and it’s certainly not something that’s resulted from some flare-up. There were conversations yesterday [from the US] with the UK and we know that there have been exchanges with Italy, Spain, Turkey. There are more than 40 countries today that are participating in this International effort to put a deal together that are ready to go out on their own if there isn’t an international solution.

We’ve been working on this issue of digital for more than 2-3 years now. Next week we will have a discussion at the OECD where all the elements will be put in place. The idea is that by June or July we will have all the numbers that are required and that in the second half of 2020 we go for implementation. We need all 137 to be on board.

And if not...

WIth the US authorities still openly resistant to elements of what’s been proposed to date, that’s a big ‘if’, particularly in an election year where the incumbent administration will be seeking re-election on an America First mandate. No matter how much work has been done so far, the timetable pitched by Gurria is tight. So what happens if a deal can’t be done by the end of this year?

For his part, French Finance Minister Bruno Le Maire is to the point:

In that case, we’ll come back to the national solution and digital companies will be taxed under French national law. We have only decided to postpone the pre-payment of April to December to give some time for the negotiation. But in any case, digital companies will have to pay.

He added:

We were the first country to introduce a digital tax, in 2019, for one reason: there is a loophole in international taxation and the loophole is digital activities. The biggest companies in the world are making huge profits from millions of consumers in territories, but they do not pay their due taxes. Nobody can accept that.

Katharina Pistor, Edwin B. Parker Professor of Comparative Law, Columbia Law School, concurred, suggesting that the current situation can border on corruption by large corporates:

What is legal and what is illegal is a fine line and it’s very blurred because no tax code can ever be watertight. Unfortunately some of the most powerful law firms and consulting firms are helping multi-nationals to avoid taxes. We know that the border line to evade taxes is blurred and they are participating in that. Just because it’s basically a white collar business shouldn’t stop us thinking about this in corruption terms as well.

Perhaps stung by the perception that US pressure has caused France to back down from its national plan, Le Maire insisted:

Digital companies in France will pay their due taxes in 2020 - I want to be very clear on that… We will never give up, let’s be clear. We have decided to introduce a fair digital tax at the national level. It has been paid in 2019. We have just given some time to have an International solution. We are all of the view that it is far more preferable to have one single International solution for fair and efficient taxation of digital activities instead of having many national taxations all over the world, especially in Europe. But let’s be clear, in 2020 all the digital companies that are under the scope of either the OECD or national taxation will have to pay.

If that means a restoration of President Donald Trump’s threatened $2.4 billion of tariffs, then everyone will lose out, he added:

A trade war would have two consequences. First, a slowdown in growth and it would mean the end of international negotiation, the end of an international solution for both digital taxation and minimum taxation. I think we all have to give a chance to this international negotiation. We are united in Europe. 

Given that France’s attempts to bounce European Union member states into a single European Digital Services Tax ended in failure last year when the likes of Ireland and Germany put their national vested interests first, that last remark seem highly to open to question, although OECD’s Gurria was quick to emphasise that both of those countries are participating in the current global negotiations.

What next? 

If Gurria’s optimism does turn out to be justified and some kind of global consensus is achieved, it’s far from the end of the story. Delia Ferreira Rubio, Chair of non-profit advocacy group Transparency International, observed:

Once we have the rules, the rules should be implemented and there we have another problem. The rules should be absolutely clear. The work done until now offers clear principles. It needs clear rules to be properly implemented. Then it will be the task of each of the agencies within countries to implement this with transparency as the very first principle. We need to know where companies are who are providing the services.  Where are the consumers and the creation of value? Once we know that, we need to know who is paying taxes and how much tax they are paying.

That’s not going to be easy, cautioned Pistor:

The question is whether these tax rules will be enforceable. It’s a question not only about the capacity of the tax authorities in the different countries, but also about the willingness of companies to share their information. We have to know where they have raised the value that we’re trying to tax. There could be a lot of disputes. There are thoughts about an arbitration tribunal to resolve disputes. I would like to know more about that. I would like to know who would be sitting on this arbitration tribunal, who would appoint the arbiters and how this would be enforced?

One sceptical thought that I have is that given the amount of disputes about what is the residual profit that shall be taxed, what is the right threshold, all the kinds of issues that will be raised, companies have a lot of resources. They can bring a lot of disputes to arbitration. The question is now many countries will have the time and resource to go through these kinds of disputes and make sure that they really collect their tax base? I’m nervous about the implementation phase.

Implementation will be critical, admitted Gurria, but there’s no alternative other than to proceed down the current path, he said: 

There is no 'Plan B'.

My take

Good luck to the OECD, but I can’t help siding with Pistor on the prospects of this delivering on Gurria’s undoubted enthusiasm for a deal. Le Maire spent a lot of time posturing about France’s leadership on this issue, hinting that it was down to President Macron that the US was at the negotiating table at all. I’d say that was the most delusional thing I’d seen around this topic today, but then the UK’s Liz Truss opened her mouth. One thing’s for certain - we’re all in for a bumpy ride over the next few months.