1. Introduction
1. The last report of the Parliamentary
Assembly of the Council of Europe, enlarged to include the delegations
of national parliaments of the Organisation for Economic Co-operation
and Development (OECD) member States which are not members of the
Council of Europe and the European Parliament (Enlarged Assembly)
dates from October 2017 and covers the OECD activities for the 2016-2017
period (see Resolution 2181 (2017)).
2. Following the meeting between the former President of the
Assembly, Mr Michele Nicoletti, and the Secretary-General of the
OECD, Mr Angel Gurría, in February 2018, and further to contacts
between the respective Secretariats, a renewed approach to relations
between the Assembly and the OECD was agreed in January 2019, aimed
at a stronger and more efficient institutional relationship, streamlining
procedures and making better use of both Organisations’ strengths.
3. In line with this agreement,
Enlarged
Assembly debates on the activities of the OECD take place every two
years, on the basis of a report presented by the Committee on Political
Affairs and Democracy, with the participation of delegations of
national parliaments of OECD member States which are not members
of the Council of Europe, and of the European Parliament, and of
the Secretary General of the OECD. Reports will focus on specific
themes to be defined by the Rapporteur in collaboration with the
OECD. During the same year, an exchange of views with OECD experts
will be organised as part of the agenda of the committee, in the context
of the preparation of the committee’s report on the OECD activities.
4. During the year when there is no Enlarged Assembly debate
on the OECD activities, an Assembly delegation, possibly led by
the President of the Assembly or the Chairperson of the Political
Affairs and Democracy Committee, participates as an institutional
partner to the OECD Global Parliamentary Network. During the same
year, the Committee on Political Affairs and Democracy holds, in
principle, one meeting at the OECD Headquarters, with the purpose
to exchange views with OECD experts.
5. As a result, an Assembly delegation, led by former President
of the Assembly, Ms Liliane Maury Pasquier, participated in the
OECD Global Parliamentary Network in October 2019, for the first
time as an institutional partner.
6. Following a motion for a resolution agreed upon by the Committee
in conformity with the new modalities, in January 2020, I was appointed
rapporteur for the present report.
7. As regards the scope of the report, I intend to focus on a
topical issue on which the OECD has been working for the last years
and which is of particular political relevance in all member States
of the Council of Europe: the challenges posed by evidence of fiscal
injustice in the course of the ongoing economic and employment crisis,
especially taxation of the digital economy, as part of the OECD’s
ongoing work on Base Erosion and Profit Shifting (BEPS). I will
also include a chapter related to the OECD’s recent work on tax
policy responses to the Covid-19 pandemic,
including its data-base
of measures implemented by governments
in response to the crisis, which provides useful guidance to governments
and parliaments in member States.
8. The ability of governments to raise funds through taxation
necessary for the funding of public services is a fundamental anchor
for democracy. When the tax avoidance strategies of companies and
individuals undermine governments’ legitimate financing abilities,
the very fundamentals of democracy, fairness and equity are threatened
. In
the framework of OECD activities, the Enlarged Assembly has already
recognised the importance of addressing social inequities and implementing
suitable measures to alleviate employment issues, as part of the
achievement of sustainable and inclusive growth, which help restore
confidence in our governance system.
I also refer to a number of relevant
reports prepared by the Committee on Social Affairs, Health and
Sustainable Development on tax havens; on tax on financial transactions;
the Panama papers; and more recently on the platform economy.
9. Several studies provide evidence of competition between countries
to lower corporate income tax rate, which could result to a race
to the bottom: in 1980, corporate tax rates around the world averaged
40.38%, and 46.67% when weighted by GDP, whereas in 2019 the average
was 24.18%, and 26.30 when weighted by GDP. Tax havens and other
tax evasion practices, such as the artificial use of offshore companies,
undermine public revenues and contribute to the citizens’ perception
of unfairness of the tax system.
However,
the design of tax policies by governments and parliaments can also
lead to contradictory signals on taxation, sometimes used as an
incentive and therefore abused by tax planners and avoiders.
10. As the world has become more interconnected and more digital
over the past few decades, a growing body of evidence has shown
that aggressive tax planning and tax avoidance practices have been
adopted by many multinational corporations, making international
co-ordination of paramount importance in mounting a response against
eroding tax bases and falling tax revenue. According to some estimates,
close to 40% of multinational profits are shifted to tax havens,
with European countries being the most affected.
According
to other estimates, countries are losing globally a total of over
US$427 billion in tax each year to international corporate tax abuse
and private tax evasion, costing countries altogether the equivalent
of nearly 34 million nurses annual salaries every year.
11. With the digitalisation of the economy and the rise of tech
giants (GAFA, namely Google, Amazon, Facebook, Apple), the need
for multilateralism and internationally co-ordinated policy responses
are more urgent than ever before. Traditional taxing liabilities,
based on concepts such as “permanent establishment”, are largely
outdated in the digital economy where most value is created through
virtual and stateless platforms. In this context, the ongoing work
of the OECD is of paramount importance and it should continue to
play a leading role in international efforts to bring greater fairness
to tax policy worldwide.
12. In light of the ongoing economic crisis caused by the Covid-19
pandemic, addressing these issues and providing governments with
a broader tax base to cover their public financing needs becomes
more urgent than ever before.
According
to the statement, approved by the OECD/G20 Inclusive Framework on
BEPS in October 2020, “[t]he Covid-19 crisis has exacerbated
these tax challenges even further by accelerating the digitalisation of
the economy, increasing pressures on public finances and decreasing
public tolerance for profitable multinational enterprises (MNEs)
not paying their fair share of taxes”.
2. OECD and taxation of the digital economy
13. During the Standing Committee
meeting of the Assembly, held on 12 October 2020, the Secretary-General
of the OECD, Mr Angel Gurría, stated: “The OECD has worked hard
to build a fairer, more transparent international tax system, tackling
BEPS [Base Erosion and Profit Shifting] issues as well as bottlenecks
that are being faced by developing countries when it comes to taxing
multinationals. We are also making tremendous progress on delivering
a global solution to the tax challenges presented by our digitalised economies.”
14. Through the Inclusive Framework on BEPS, work at the OECD
has spearheaded and co-ordinated the efforts of countries around
the world for the development of a comprehensive framework to address
how highly digitalised multinational corporations should be taxed
and how taxable profits should be allocated among jurisdictions.
The Inclusive Framework brings together a group of 137 jurisdictions,
working together on an equal footing, to implement the 15 BEPS actions
agreed in 2015.
Beyond this,
the Inclusive Framework is now designing new international tax rules,
facing the tax challenges arising from digitalisation.
15. The cost incurred by aggressive tax planning for tax authorities
and the use of technology and intellectual property by most digital
multinational firms exacerbates the challenges posed by reform on
international taxation. The economic and social importance of those
multinationals places them at a position of “price makers” namely
bearing little or no competition at all.
16. Amongst the many actions included in the OECD/G20 BEPS Project,
Action 1 is dedicated to policy responses for the tax challenges
arising from digital economy. Recent work in developing such policy
proposals has made significant progress in addressing how taxing
rights should be allocated between countries in response to business
arrangements and transactions involving high-tax and low-tax jurisdictions.
17. The policy proposals are separated in two pillars. Pillar
One addresses the broader challenges of taxation of the digital
economy and focuses on how taxing rights are determined (namely
nexus) and how taxable profits are
allocated among jurisdictions. The second Pillar tackles the remaining
BEPS issues related to tax planning, through the establishment of
a global minimum tax.
18. Work on Pillar One has advanced over the past years, with
growing commitment by participating countries for a consensus-based
solution to be reached by mid-2021. Converged country positions
led to a joint statement in January 2020 outlining the general framework
of discussions in the two pillars.
While unilateral country
positions, actions and opinions are still strong amongst participants,
work has been continuing in 2021 for a consensus-based agreement
on both pillars.
19. In order to contribute to the BEPS actions on digital taxation,
the European Commission published, in 2018, its own proposal on
a Council Directive laying down rules for firms with a significant
digital presence in European Union member States. The Directive,
envisaged to establish a comprehensive solution for the taxation
of digital services in the European Union, was intended to contribute
to the ongoing work of the Inclusive Framework which the European
Union acknowledged would be essential to reaching a global consensus.
The Commission proposals outlined
criteria for establishing a taxable nexus of a digital business.
20. Three alternative criteria representing proxies of a multinational’s
activity in member States were proposed in the Directive. These
were aimed at determining the “digital footprint” of firms operating
in member States. They were based on taxation according to the location
of the permanent establishment but sought to reallocate the share
of profits arising from value creation through user participation
(for example, data collection through rating of goods and services
on the E-platforms).
21. In addition to the Directive, the European Commission’s proposals
included an interim 3% tax levied on the revenue of digital activities.
The tax aimed at creating immediate
revenue for member States from firms conducting digital activities
in jurisdictions where they have no taxing liabilities under the
current “permanent establishment rules”. The Commission set up a
scope for the proposed tax based on qualitative (consumption of
digital services) and quantitative (firms with worldwide annual
revenue over €750 million and European Union revenue over €50 million)
criteria.
22. At the European Union level, Finance Ministers discussed the
European Commission proposals in December 2018 but were unable to
reach agreement despite support from the majority of member States.
23. The differences in proposals among countries, evidenced by
the alternative viewpoints across the Atlantic on how to treat the
taxation of the digital economy, reveal the difficulties in reaching
a consensus-based solution through the Inclusive Framework.
24. It is evident that developments at the global level in the
business models of highly digitalised multinational corporations,
together with increasing tax planning and tax avoidance practices,
call for a change in the principles and norms of international taxation.
Reforming international taxation at the OECD/G20 level is particularly
important given that the existence of conflicting national taxing
statutes give rise to litigation, legal uncertainty for the corporate
taxpayer and significant administrative costs for tax authorities.
As affirmed by the Secretary-General of the OECD, Mr Angel Gurría,
at the Standing Committee meeting of 12 October 2020), “[…] the
137 members of the OECD/G20 Inclusive Framework on BEPS released
the Blueprints of the Two Pillar approach, the Blueprint of Pillar
One and the Blueprint of Pillar Two. We are reaching closer to the finishing
line but not quite there yet, political differences remain to be
bridged and further technical works have to be finished, but political
compromises therefore are needed, so that a full-fledged consensus
can be delivered by the mid-2021”.
25. Complementary to the need for reaching a consensus-based agreement
for strengthening public finances in the ongoing pandemic crisis,
the cover statement by the OECD/G2O Inclusive
Framework on BEPS on Pillar One and Pillar Two Blueprints, approved
on 9-10 October 2020, speaks also to the continual need for improving
tax fairness, through the design of a more equitable allocation
of tax liability among firms and citizens and a more effective level
playing field between OECD/G20 countries.
3. Pillar One: a unified approach and
a new taxing right
26. Following discussions on several
proposals by Inclusive Framework members, a unified approach to
the architecture of Pillar One was agreed to be used as a basis
for negotiations that have started in January 2020. At the heart
of the unified approach is a shift towards allocating some taxing
rights to market jurisdictions.
27. The unified approach involves a new taxing right that is intended
to apply to firms regardless of their physical presence in jurisdictions
of operation. Instead, the new right seeks to allocate a portion
of residual profits to market jurisdictions using a formulaic approach.
The United
States has suggested a pause in the OECD talks on international
taxation while governments around the world focus on responding
to the Covid-19 pandemic and safely reopening their economies.
Some
fear that Joe Biden’s presidency will not mark a turning point on
the United States’ collaborative stance with regard to the BEPS
project because of the “fundamental nature of corporate America
and notion of defending [their] national champions”,
as many of the multinationals affected
by Pillar One are based in the United States.
28. The need to create a taxing right for corporations with digital
presence stems from the way business models have evolved over the
years to become increasingly more global, more digital in their
functioning and more user-based in their approach. In particular,
participation of different users in the form of platforms, being either
consumers or suppliers of products and services, has altered the
nature of the output of production, in such a way that taxable profits
can no longer continue to be allocated by rules based exclusively
on physical presence in a jurisdiction.
29. Under current international tax practices, a non-resident
company is taxed in a jurisdiction only if it has a permanent establishment
in the form of physical presence in that country or in the form
of an agent conducting business on behalf of the non-resident company.
Digitalisation severely limits the ability of countries to tax a
company based on presence. In the case where taxation of these companies
is based on physical presence alone, the majority of countries would
have no or only a limited right to tax profit from their activities, despite
the fact that these companies may be generating their profits in
their jurisdictions, albeit remotely. For example, a non-resident
company can conduct marketing activities and negotiations through
intermediaries that avoid being under the scope of the permanent
establishment definition, whilst concluding contracts in overseas
affiliates resident in tax havens or low-tax countries. The increase
in digitalisation affects the mobility of firms and favours tax
planning and tax allocation practices by the companies, which often
result in limited profits being attributed to market jurisdictions.
The scope of the new taxing right attempts to address this kind of
activities in the digital economy.
30. In particular, the new taxing right will apply to two broad
sets of businesses. Firstly, to multinational corporations that
provide automated digital services around the world. Many of these
businesses depend on users for the provision of services, such as,
on their personal data, on personal optimisation of content and
on content that users themselves supply to the platform. Companies
that fall within this category include large social network platforms,
search engines, and streaming services which, over the years, have
grown in market size and importance becoming the most valuable in
global stock markets. Beyond businesses that engage with users,
the new taxing right, as defined in the Blueprint, would also apply,
for example, to cloud computing. The second set of businesses are
consumer facing businesses, i.e. multinational corporations generating
revenue by selling goods and services both online and directly to
consumer. These businesses are able to engage with consumers in
a meaningful way beyond having a local physical presence by relying
on digital technology to reach consumers in order to sell their
products, build business contacts and for targeting specific groups
of consumers. The precise scope of the new taxing right for the
latter group of corporations is being determined as part of the
ongoing work of the Inclusive Framework.
3.1. Comparison of the unified approach
to Pillar One with similar European initiatives
31. The new taxing right diverges
in several ways from the European Commission’s Proposal of a Directive on
taxation of corporations with a significant digital presence in
2018. Currently, jurisdictions can levy taxes based on profits reported
by firms that have a physical presence in their jurisdiction. The
Directive determines the attribution of a digital tax based on the
location of end users but does not separate profits made in specific locations
by end users. The novelty of the new taxing right manifests that
a share of the multinational group’s residual profit is allocated
to market jurisdictions using a formula approach. This new taxing
right can apply irrespective of the existence of physical presence.
Moreover, the method of determining the multinationals in scope
is also different, with the Directive having three thresholds, at
least one of which must be fulfilled for multinationals to be in
scope: corporations are liable to pay tax in member States where
they report revenues of at least €7 million; or where they have
at least 100 000 users; or at least 3 000 business contracts.
32. A distinction is drawn also between Pillar One and the interim
solution proposed by the European Commission for a digital services
tax, a similar version of which was adopted in 2019 by France in
the form of the Digital Services Tax. The Commission’s proposal
on a digital tax targets companies which conduct services where
“the participation of a user in a digital activity constitutes an
essential input for the business carrying out that activity and
which enable that business to obtain revenues therefrom. In other
words, the business models captured by this Directive are those
which would not be able to exist in their current form without user involvement”.
This approach is quite different
from the Inclusive Framework’s approach which applies across automated
digital services as well as consumer facing businesses.
3.2. Recent developments in Pillar One
33. Overall, work that remains
to be done by the Inclusive Framework of BEPS includes agreement
on the rules, formulae and profit thresholds governing the new taxing
right, as well as the agreement on the profit allocation between
jurisdictions based on revenue-sourcing. An international agreement
is necessary to swiftly address the remaining issues with a view
to bringing the process to a successful conclusion, resolving technical issues
and developing draft model legislation and guidelines to enable
jurisdictions to implement a consensus-based solution for Pillar
One by mid-2021.
34. Opinions held by members of the Inclusive Framework fell initially,
that is at the time of the 2018 Interim Report, within broadly three
groups, reflecting not only political and ideological divergence
but also conflicting national interests. A first group, including
the majority of European countries, regarded the highly-digitalised business
models, in particular those that rely on the use of data and user
participation, as a source of misalignment between the location
of taxed profits and the creation of value. For this group, the
value created by these firms is partly due to the user and takes
place in jurisdictions away from the corporation’s place of establishment.
A second group of countries, predominantly emerging and developing
ones, claimed that developments in the digital economy should follow
more general trends in globalisation and be addressed as a whole,
rather than being focused entirely on a specific sector, as a problem
of profit allocation and base erosion. They regarded the changing
global economy, including the rise of digital business-models, as
a main driver of profit shifting. Lastly, a third smaller group
of countries considered the existing international tax rules adequate
for corporations and did not envisage the need for reform.
35. Several European countries argue that tech giants profit enormously
from the European market while making minimal contributions to public
coffers. The United States, under Trump’s administration, remained opposed
to digital services taxes and similar unilateral measures and attempted
to establish Pillar One as a ‘safe harbor’ for multinational corporations.
Despite the absence of an international agreement by the end of 2020,
following the lead of France, Italy, Spain, Austria and the United
Kingdom have all announced plans to levy digital services taxes.
In response, the United States has threatened retaliatory tariffs
on some imported goods from those European countries that have enacted
a digital service tax. In this regard, Robert Lighthizer, the US
trade representative, announced a probe into whether these digital
tax measures amount to an unfair trade practice.
36. The United States remain committed to global talks on a new
global tax framework for tech companies. Besides the divergence
of opinions, the Inclusive Framework members note that reaching
a consensus-based resolution by mid-2021 remains of paramount importance.
4. Pillar Two: a minimum tax rate
37. Proposals in Pillar Two, providing
for a minimum tax rate, are designed to reduce the pressure on developing
countries to grant tax incentives, thereby limiting the tax avoidance
practices of firms.
38. The primary measure of Pillar Two is the global anti-base
erosion proposal (GloBE), which rests on the need for co-ordination
between countries to avoid a harmful race to the bottom. The scope
of the proposal is not limited to highly digitalised companies,
but it also envisages a systematic solution to profit shifting and
base erosion by agreeing on a minimum level of tax at a global level.
39. Work on Pillar Two has progressed in the relevant working
groups of the Inclusive Framework over the past year. A general
approach to the topics of Pillar Two has been agreed on and the
report on the Pillar Two Blueprint
provides a solid basis for a future
agreement on several aspects of the reform. Pillar Two proposes a
minimum tax rate to be applied to corporations’ income where the
current tax rate is lower than the agreed minimum. Essentially this
ensures that the income of any large multinational corporation is
taxed at a minimum rate in each jurisdiction where the multinational
enterprise operates, thus reducing the incentives to shift profits to
low tax jurisdictions and thereby erode the tax bases of other jurisdictions.
The overall design of Pillar Two rules is an essential part for
a consensus-based agreement in 2021.
5. Way forward
40. In providing an evaluation
of recent developments and mapping a way forward, a starting point
should be the acknowledgment of the changing digital nature in business
practices, the acceleration of globalisation and the increasing
awareness of tax avoidance by multinational corporations.
41. Global business models and digital practices have evolved
rapidly from location-based to being increasingly remote from countries
of operation, with profound consequences to century-old double taxation agreements.
It is clear that the 1920s agreement, designed to avoid double-taxation
practices between countries and to tax firms based on their legal
establishment, can no longer capture the entire tax base and allocate
profits to the countries where wealth is generated. This is because
provisions in those same double taxation treaties are used by taxpayers
engaging in tax avoidance strategies (for example, clauses on withholding
taxes). Hence, the establishment of new international taxation norms
is a long overdue response by the international community to the
fast-changing digitalised model of multinational companies. At the
same time, maintaining established treaties on double taxation and
introducing new practices to ensure full taxation of profits should
not be mutually exclusive. Success lays in finding a consensus that
incorporates the new tax norms and embedding them with established
international taxation practices that avoid double taxation between
countries.
42. The political appetite across countries for an agreement on
a new norm for international corporate taxation has been driven,
firstly, by an increased awareness of the general public to cases
of tax avoidance and profit-shifting and, secondly, by the worsening
state of public finances that the global economic crisis left behind
it since 2008, which undermines the Keynesian capacities and the
integrity of services of welfare states. The several cases of large
multinationals using tax avoidance practices, that appeared in the
media over the past years, have shifted public opinion (especially
among European voters) towards the need for a fairer taxation of
corporate profits. Tax avoidance schemes such as the Luxembourg
Leaks, the Panama Papers and more recently the Openlux investigation,
have exposed aggressive tax planning attitudes of the most powerful taxpayers
in the world. The recent Paradise Papers (end of 2017) is a reminder
that tax avoidance practices are a systemic and resurgent problem.
For European voters in particular, a lower tax base from corporate income
was associated with an increased burden of higher taxes on labour
incomes and consumption, as governments sought to increase government
revenue sources during the crisis.
43. Although the discordances between the European countries and
the United States regarding the right to impose a digital tax will
need to be overcome to reach an international agreement, a unified
approach is estimated to be the most efficient solution for the
global economy. The two pillars would imply a relatively small increase
in the average investment costs of multinationals. The negative
effect on global GDP stemming from the expected increase in tax
revenues associated with the proposals is estimated to be less than
0.1% in the long term, since these would affect highly profitable
companies. In contrast, the absence of a consensus-based solution
would lead, as it has been already declared by various European
countries, to a proliferation of unco-ordinated and unilateral tax
measures, causing an increase in damaging tax and trade disputes.
This would inevitably undermine tax certainty and result in additional
compliance and administration costs, reducing the global GDP even
further by more than 1%.
6. The consequences of the Covid-19 pandemic
and relevant OECD work
44. In light of recent macroeconomic
developments caused by the pandemic, both above-mentioned factors will
most certainly continue to put pressure on countries in reaching
an agreement on international corporate taxation in years to come.
This is because, firstly, the pandemic will further exacerbate the
need for increasing tax revenues. Higher government spending in
automatic fiscal stabilisers, in income-support programmes and in
business guarantees will need to be compensated by additional revenue
sources following the pandemic. In addition, the large contraction
in economic activity will reduce State revenue and will increase
the gross financing needs for debt servicing in emerging and developing
countries.
45. Secondly, economy-wide lockdowns as a response to the pandemic
have caused further acceleration of the digitalised economy. Many
of the large multinational corporations that rely on digitalised
services have recorded additional sales over the past months while
most small and medium enterprises operating with limited digitalised
practices within country jurisdictions had to suspend their operations.
As digital habits become entrenched during the pandemic, the world
has more than ever before experienced a surge in digital services. Combined
with worsening public finances across countries, the digital trend
will provide a renewed cause among political forces for an international
agreement on corporate taxation in the digital economy.
46. According to an OECD research, during 2019, tax revenues fell
across the OECD for the first time in a decade. On the other hand,
the profits of the multinational digital companies have reached
historical records, especially in 2020, in the midst of Covid-19
crisis. For instance, Apple’s shares have surged over 1 200% in the
last decade and became the first US company to surpass a market
valuation of US$2 trillion.
Amazon.com shares have swelled in
just one day by 7.9%, adding thus US$13 billion to the net worth
of its CEO’s assets, the largest single-day jump for an individual
since the Bloomberg Billionaires Index was created in 2012.
The American digital
multinationals have now a total market capitalization over US$9.1
trillion, which is more than the entire European stock market—including
the European Union, the United Kingdom and Switzerland.
An even larger decrease of tax revenues
will be registered for 2021: following lockdowns and the forced
closure of many businesses due the Covid-19 pandemic, the economic
activity and consumption tax revenues were driven down. At the beginning
of December 2020, Pascal Saint-Amans, Director of the OECD Centre
for Tax Policy and Administration, stated: “We expect to see much
sharper decreases next year when the impact of Covid-19 starts to
become more apparent. At some point, when the health crisis has
passed and the economic recovery is underway, governments will need
to reconsider whether their tax systems are up to the challenges
of the post-pandemic environment
.”
Mr Angel Gurría also
highlighted that, after the Covid-19 crisis, countries will turn
to companies that are setting the pace for digital economy and increased
their income during the crises or because of the crises to look
for additional State revenues.
Most GAFA, for their part acknowledge
how much they have at stake and assert their preference for legal
certainty that comes with having an internationally agreed framework
for the taxation of their digital activities.
47. The OECD is providing valuable data and analysis on the economic
crisis due to the Covid-19 pandemic. The magnitude of this contraction
is disclosed from the OECD forecast on real GDP annual growth rate
for the year 2020, ranging from -14.4% for Spain and -9.8% for Greece,
to an overall global real GDP recession of -7.6%.
The OECD has complemented these
forecasts with a detailed policy tracker, which lists the actions that
countries have taken during the crisis. The OECD has identified
specific policy responses to support countries, advocating for increased
spending in health care, complemented by several welfare policies mitigating
the impact of the crisis on business and labour. These policies
include more generous welfare payments, income support for employees
and deferred payments for firms. Lastly, the OECD has made available
a series of resources outlining best practices and proposals in
each policy area.
48. Implementing the OECD’s evidence and analysis is crucial for
governments in order to cushion the most dramatic effects of the
current crisis, notably for more vulnerable people, and pave the
way to a smooth and inclusive recovery. Targeted and timely action
will avoid higher costs for governments over time. To achieve best
results, the optimal course for tax and fiscal policies would be
to support priority action in areas such as healthcare, trade, social
and labour market.
49. In this framework, we have identified, with the Rapporteur
for Opinion on this report from the Committee on Social Affairs,
Health and Sustainable Development, Ms Selin Sayek Böke (SOC, Turkey),
the following priority recommendations:
i. enhanced
welfare payments and income support (on a temporary basis) to all
workers, with an emphasis on lower income households and independent
and precarious workers;
ii. expand coverage and duration of social safety nets such
as unemployment insurance benefit schemes;
iii. tax relief for workers in health and other emergency-related
sectors;
iv. lowering of taxes on essential consumer goods and services;
v. suspending employer and self-employed social security
contributions, payroll-related taxes, and, where relevant, selected
taxes on essential (lifesaving) imported items;
vi. implementation of ambitious stimulus programmes, with
greater support for small and medium enterprises and green investment;
vii. better use of rapid response mechanisms and policies that
automatically adjust tax rates and transfer payments to stabilise
incomes, consumption, and business spending over the business cycle
(automatic stabilisers);
viii. promotion of policies, rules and support mechanisms for
teleworking.
7. Concluding
remarks
50. The main priority of the Inclusive
Framework is to deal with tax challenges arising from the digitalisation of
the economy by reforming the international tax system, restoring
stability to the international tax framework and avoiding the risk
of further unco-ordinated, unilateral tax measures which could trigger
trade sanctions. The framework gives prominence to the role of multilateralism
and inclusiveness. The Covid-19 crisis has exacerbated these challenges
even further by accelerating the digitalisation of the economy,
enhancing pressures on public finances and decreasing public tolerance
for profitable multinational corporations not paying their fair
share of taxes. The Secretary-General of the OECD, Mr Angel Gurría
sustains “We need to do this on a multilateral basis. […]. [W]e
need to deal with them globally, we need to deal with them multilaterally otherwise
we will not make a lot of progress. The Covid-19 pandemic is a starting
reminder of the transformational changes needed to build back better.
But we can only change course if we act together. Put in practice
the transformative power of collective actions to create better
policies for better life.”
51. The OECD’s co-operation with the G20 in addressing the taxation
of the digital economy and the establishment of the Inclusive Framework
with the participation of 137 countries, fostered inclusiveness
in decision-making and pluralism of opinion. Importantly, solutions
within this framework are not confined to a selective group of countries
but are extended to the majority of countries in the world, who
can develop a policy on equal footing. In that sense, agreement
within the Inclusive Framework incorporates the opinion of emerging and
developing countries, fragile nations and small countries, thus
making decisions more inclusive. Since tax loopholes often arise
from unilateral national measures, the wider participation provided
by the Inclusive Framework contributes to the future success of
agreed policies and the fostering of the agreed international norms.
It is within this framework of multilateralism and inclusiveness
that the success of a future agreement lays.
52. So far, the role of the OECD has been instrumental in facilitating
discussions and providing solutions in complex multinational negotiations.
The delineation of policies in the two pillars, the programme of
work, the January 2020 Statement as well as the latest economic
impact assessment of the tax challenges arising from digitalisation,
published in October 2020, and
the
Cover Statement by the OECD/G20 Inclusive Framework on BEPS on Pillar One and Pillar Two Blueprints provide a concrete
basis for discussion.
53. While an important number of issues remain to be resolved,
credit should be given to what has been achieved so far. Countries
have increased their co-operation and have abided to common principles
of taxation. Furthermore, information-flow between tax authorities
has increased dramatically over the past years, thereby limiting
the opportunities for tax evasion and tax avoidance. As for the
taxation of the digital economy, countries within the Inclusive
Framework have taken significant steps in promoting full taxation
of profits as an international norm.
54. Notwithstanding the progress made in recent years, several
issues still require further technical work and political decisions
to be resolved. Countries have so far failed to come to a common
understanding on the allocation of profits in the digital economy.
Strong disagreement and opposition to digital services taxes and
an attempt to establish a ‘safe harbor’ approach to Pillar One by
the United States, could lead to possible escalations of unilateral
actions and continue to weigh in on the final outcome.
55. In addition, a large number of emerging and developing countries
prefer to address the new taxing right with a broader approach rather
than by ‘ring-fencing the digital economy’. More specific issues
that still await to be resolved pertain to the details of the proposal,
such as the amounts of profit in Pillar One, the resolution mechanism
to ensure tax certainty and practical issues in Pillar Two for a
minimum tax at a global level.
56. Undoubtedly, significant work remains to be done for countries
to achieve a consensus-based agreement by mid-2021. It is for this
reason that the work of the Inclusive Framework has not escaped unscathed
from criticism by academia, tax experts and the business world alike.
It results in a combination of different proposals, building on
top of century-old treaties. Yet, it is important for the remaining
work to move forward, for the remaining issues to be resolved and
for agreement to be reached, rather than to revert to any other
alternative.
57. In game theory, a well-known result in a prisoners’ dilemma
shows that co-ordination between players is necessary in order to
reach the most efficient outcome. In the absence of an agreement
among the members of the Inclusive Framework, the world is at a
greater risk of unilateral actions and escalated trade wars. Such actions
might arise as a threat or as a short-run response to another country’s
actions. A possible escalation of actions may endanger the welfare
of citizens and lead to further erosion of tax bases around the
globe. Thus, co-ordination of actions is key in addressing eroding
tax bases, since the benefit of one country often comes at the expense
of another. Similarly, Mr Angel Gurría warned that the alternative
of no agreement around the OECD proposals, on Pillar One and Pillar
Two, will cause a multiplication of many countries going alone and then
facing retaliation by other countries who feel that this is against
their own companies. In addition, “The last thing we want in today’s
world is to have a revival of the trade tensions that clustered
already even before Covid, a lot of growth, a lot of well-being,
a lot of job and a lot of investments. I believe that the US are
among the 137 countries that have been working with us. With their
wisdom, they disagree but continue to work towards the technical
solution and all of that is on the table.”
58. Maintaining momentum and finding solutions to the remaining
issues through the Inclusive Framework is paramount for all countries
and institutions involved in the process. The divergence of positions
maintained in negotiations, specific country-interests and ideological
differences in taxation norms pose great risks in reaching agreement
within the envisaged timeframe. At the same time, the increasing
trends towards digitalisation, the strain in public finances due
to the global pandemic and the increased awareness of the public
opinion of issues in international taxation, make the need for a
timely agreement.
59. Given the role of the OECD in supporting the Inclusive Framework,
the role of collaborating institutions, such as the Council of Europe,
should be to support building consensus amongst its members, while
offering a helping hand in bridging diplomatic ridges. Holistic
policies taking account not only of tax challenges but of all aspects
of countries’ economic realities hold the key for an efficient response.
60. At a time when the crisis and its fallout have undermined
citizens’ confidence in democratic institutions, policymakers need
to take a leap of faith in rebuilding trust in government, through
transparent and more open institutions, high standards of integrity,
particularly in high-risk areas such as lobbying, public procurement
and political financing. Cracking down on aggressive tax avoidance
and evasion, ensuring fair taxation and adequate fiscal revenues,
to maintain sound public finances and high-quality social services
for all citizens is an essential part of this effort.
61. To ensure fair taxation of global corporate profits, the Enlarged
Assembly should urge the OECD and member States to:
i. further support and promote the
Inclusive Framework on Base Erosion and Profit Shifting (BEPS) in reaching
a consensus-based agreement, including Pillar One and Pillar Two,
within the envisaged timelines;
ii. facilitate the application of the agreed multilateral
instrument to existing tax treaties;
iii. avoid and reverse a race to the bottom of national tax
systems, which could undermine governments’ legitimate financing
abilities in maintaining sound public finances and high-quality
universal public social services for all;
iv. adopt rules on transparency and automatic exchange of
information for tax purposes between all countries in order to ensure
tax fairness and compliance by both corporate entities and individuals;
v. develop mandatory disclosure rules regarding aggressive
or abusive transactions, arrangements or structures, with a focus
on international tax schemes;
vi. propose measures for countering harmful tax practices
more effectively, with a priority on improving transparency, including
compulsory spontaneous exchange of rulings related to preferential
regimes and on requiring substantial activity for any preferential
regime;
vii. promote international coherence of corporate income taxation,
so that the design of tax policy is better informed by the increasing
interconnectedness of economies and the gaps that can be created
by interactions between domestic tax laws;
viii. do more to take account of the needs and interests of
developing countries in this respect.
62. Willingness among countries to compromise on the main issues
of the proposals such as the definition of the new taxing right,
the allocation of profits between jurisdictions and the level of
the minimum corporate taxation, will facilitate discussions and
contribute to a renewed international tax norm. Despite the problems faced
in achieving a common solution, this multilateral, inclusive approach
can offer a better prospect in addressing the remaining issues in
the taxation of the digital economy.