International taxation of the digital economy: can the OECD unify its members? | Smith, Gambrell and Russell, LLP

As the global economy evolves and accelerates rapidly, the OECD has focused heavily in recent years on developing and strengthening international tax rules. In February 2013, the OECD released a report responding to concerns that existing international tax standards do not reflect an increasingly globalized economy, and more specifically a steadily growing digital economy. The OECD focuses on answering two key questions that come up frequently: First, given that multinational enterprises (MNEs) represent a larger proportion of the global economy over time, and that more and more EMN offer digital products and services to the value of these intangibles created? Second, how should they be taxed?

A few years later, in 2015, the OECD developed a new international tax framework (“Inclusive Framework”) and invited interested countries and jurisdictions to negotiate and implement multilateral agreements under it. To date, more than 135 member countries and jurisdictions are striving to achieve consensus within this framework.

Then in 2019, the OECD refined its framework and implemented a two-pillar approach. The first pillar is designed to redefine the ‘nexus’, or where taxing rights should arise. While traditional taxing rights may result from a company’s physical presence in a particular jurisdiction, the OECD proposes to redefine the terms to more accurately capture revenue and sales activities. The aim of the first pillar is to ensure that MNEs will pay taxes wherever they carry out sustainable and important activities, even where they are not physically present.

The second pillar aims to establish a global minimum tax to ensure that large MNEs pay minimum tax regardless of their tax jurisdiction. The general objective of the second pillar is similar to that of the Global Low Tax Intangible Income (GILTI) regime promulgated under the 2017 Law on Tax Cuts and Jobs: (i) ensure minimum taxation at all times. by avoiding double taxation or taxation in the absence of profit, (ii) dealing with the different conceptions of tax regimes by the jurisdictions as well as the different operating models of companies, (iii) ensuring transparency and rules fair play, and (iv) minimize administrative and compliance costs.

In recent years, however, negotiating efforts among member countries have cooled due to rising political differences and the COVID-19 pandemic. At the same time, a growing global trade war appears to be heating up. In June 2020, the United States announced that it would suspend OECD negotiations. That same month, the United States Trade Representative (USTR) announced one of its largest investigations into various digital services taxes (DSTs) that have been adopted or proposed by ten of its trading partners. As of March 26, 2021, USTR has continued its efforts by issuing a public notice and commentary process on DSTs adopted by six of the original ten trading partners: Austria, India, Italy, Spain, Turkey and the United Kingdom. It further contends that until international consensus is reached, it will maintain the option under section 301 of the 1974 Trade Act to impose tariffs.

What’s so troubling is that even as a global consensus-driven framework is taking shape, rifts are quickly emerging as more countries adopt unilateral DSTs. There appears to be some form of prisoner’s dilemma at play, as individual countries struggle to choose either to cooperate by participating in a unified tax plan or to act in their own best interests by adopting their own digital tax policies.

On April 7, 2021, the U.S. Treasury Department released the Made in America tax plan, which was shared with the OECD for review and integration into the framework. President Biden’s tax proposal specifically describes a plan to tax multinationals under an overall minimum corporate tax. It remains to be seen whether the OECD will ultimately adopt and integrate key elements of Biden’s tax plan into its framework, or whether the United States will unilaterally sign them into law. The pressure is on as the global community watches to see if the OECD can help its members reach an agreed set of international tax rules, or if feelings of protectionism and mistrust will turn into an all-out global trade war.

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