- Important step to establishing a framework fit for the 21st century
- Business community has welcomed the opportunity to contribute to the process
- This is beginning, not the end of the process and there is still significant work to be done before October G20 Meeting
On the 10th of July, G20 Finance Ministers endorsed the plan to reform the international tax framework. This plan was previously broadly agreed by 132 countries of the Organisation for Economic Cooperation and Development (OECD)/G20 Inclusive Framework, to address the tax challenges of digitalisation.
While significant political and technical details have yet to be agreed, the International Chamber of Commerce (ICC), representing the global business community, has welcomed this development which marks an important step to establishing a consistent international tax framework that is fit for the 21st century.
The agreement underscores the importance of international collaboration and sets a foundation for further clarity on the details and application of the proposed rules to address the tax challenges of digitalisation. The two-pillar package – including rules for re-allocation of taxing rights and a global minimum tax - is the culmination of years of technical work and intense negotiations.
The business community welcomed the opportunity to contribute to the process, and welcomes continued and ongoing engagement with the OECD. It is important to note in this regard that the ICC Commission on Taxation – which I Chair – considers the G20 statement to be the beginning, rather than the end of the process, laying a foundation that needs to be fully fleshed out by detailed legislative rules and administrative guidance to follow.
ICC has always advocated for a consistent global tax system, founded on the premise that stability, certainty and consistency in global tax principles are essential for business and will foster cross-border trade and investment.
The OECD announcement of the agreement notes that the package accommodates the various interests, including those of small economies and developing jurisdictions. We are supportive of a truly inclusive approach for both developed and developing countries.
The economic implications of the global deal are of considerable importance particularly as countries seek to restore public finances and rebuild the economy after the crisis caused by the global pandemic. In this respect, taxation plays a pivotal role in providing a predictable and stable flow of revenue to finance public spending, and shape the environment in which investment, employment and trade takes place. As such details are negotiated, it will be important for countries to have credible economic impact assessments for their particular countries.
The fundamental architecture and parameters agreed on by the Inclusive Framework set a solid foundation for final agreement in October on the remaining elements and implementation plan, but critical pathway work is needed over the summer on key areas, as outlined below.
It is important that the new rules are implemented in a coherent and co-ordinated manner and in close cooperation with business. This is to ensure the reforms are administrable for both tax administration and taxpayers and will not impose double taxation on international business which creates undue friction for investment.
ICC Commission on Taxation’s Recommendations
Digital services taxes
ICC is pleased to note that countries have agreed to appropriate co-ordination between the application of the new international tax rules and the removal of digital service taxes. However, ICC recommends that detailed work proceed quickly to establish:
- Which specific taxes are included in the roll-back (i.e., which countries’ specific digital taxes by name are to be removed, and which other ‘unilateral measures’ (again by name) are to be removed);
- The timeline for rollback of such measures, including clarity on how the respective domestic legislatures will be held to account in terms of adhering to a rollback timeline (perhaps by ongoing monitoring and peer review);
- How the inevitable disparities between the rate at which two countries can take legislative action will be handled, even where both such countries are fully committed to the rollback (including in particular where supranational input is in play, such as in relation to the European Union).
Unilateral disparate tax rules that introduce double or multiple standards create compliance challenges for business and essentially undermine the consistency of the international tax system and create the risk of double taxation. This is especially true for digital service taxes (DSTs) and comparable measures.
ICC believes that certainty and stability are cornerstones of facilitating international trade. Disparate rules are likely to result in ever-increasing layers of complexity for multinationals arranging their cross-border operations.
Global minimum tax
As the Inclusive Framework provides details of a global minimum tax, co-ordination between jurisdictions on existing rules and the new framework will be essential to reduce complexity and risks of double taxation.
The ICC recommends detailed work be done over the summer (in time for the October G20 meeting) on the form and nature of the legal instrument that will be used to effect coordination of the rules.
With certain aspects (such as the Subject to Tax Rule) requiring treaty-based changes, and others (such as the Income Inclusion Rule) requiring only domestic law changes, ICC believes it is imperative that a clear roadmap is set out for the basis upon which interested countries will implement these new rules and clearly prioritize the ordering of such rules.
ICC considers that, all things being equal, a multilateral instrument of the type used in the original would be the most obvious way forward for treaty-based changes, with minimum standards and peer review (plus agreed defensive counteraction measures for delinquent contracting states) being used in relation to domestic changes.
ICC strongly encourages the OECD to focus over the next 12 weeks (ahead of the October G20 meeting) on bringing additional clarity to areas of the two-pillar proposal that are still in need of detail in order to have a workable overall proposal in October. ICC acknowledges that a final implementation package including tax authority guidance is expected.
A model legal instrument seems an unworkable goal for October, and therefore ICC believes that the OECD should focus its efforts on the critical pathway items that are needed to have a sufficiently clear framework that all countries can agree to.
In this regard, ICC would recommend that as a minimum, clarity be given on:
- The minimum rate (rather than the reference to a rate of “at least…”;
- The specific unilateral measures that will be rolled back, and the timeline and process for rolling them back;
- How pre-entry losses, other tax attributes, and deferred tax will be handled by the new rules;
- How double taxation will be eliminated;
- The specific simplification measures (such as the potential CBCR exemption for Pillar II) that will be implemented;
- The legislative basis for interested countries to implement the proposals; specifically how segmentation will be applied under Pillar I (rather than the present statement that it will be used “in exceptional circumstances” – this is critical for equitable and consistent application of the new rules); and
- The precise manner in which the US GILTI regime will coexist with the new rules.
Dispute prevention and resolution
It is imperative that a strong process for dispute prevention and resolution is built into the final framework to mitigate the risks of a damaging proliferation of double taxation disputes. Furthermore, clear and administrable rules will be key to preventing disputes. ICC, as the leading dispute resolution body globally, would be pleased to collaborate with the OECD on the creation of model guidelines and principles for the effective resolution of such disputes.
Implementation of the rules
ICC appreciates the OECD’s acknowledgement of the importance of ensuring a simple and cost-efficient administration of the new rules. However, ICC reiterates the importance of co-ordination between countries with respect to the application of the rules (including the reallocation of profits), and would welcome greater clarity from the OECD on precisely how the new rules will be made simple and cost-efficient for tax authorities and taxpayers. Noting that they bring many new requirements into the tax compliance landscape such as jurisdictional ETR computations.
Global tax reform
ICC would welcome a firm commitment from the OECD to no further global tax reform projects for a meaningful period of time (all things being equal). The business community is keen to avoid a ‘BEPS 3.0’ scenario, noting that there is a view that certain aspects of the work carried out as part of the original BEPS project from 2013 to 2015 have been cast aside in a relatively short period of time (when some countries are still in the process of implementing those original reforms).
About the author
This post was written by Christian Kaeser, Chair of the ICC Commission on Taxation and Global Head of Tax at Siemens, with assistance from Matthew Herrington, Partner and Head of International Tax for Corporates at KPMG and Tom Roesser, Tax Policy Counsel at Microsoft.
The ICC Commission on Taxation is a global community of practice comprised of taxation experts that promote transparent and non-discriminatory treatment of foreign investments and earnings that eliminates tax obstacles to cross-border trade and investment.from ICC member companies. To learn more about opportunities to engage with the Commission, please contact your local ICC National Committee.
To read ICC Secretary-General, John W.H. Denton AO’s reaction to the announcement, please click here. For specific details on the Commission’s recommendations for the G20 Tax Framework, please click (here).