Today, on 12 October, Pascal Saint-Amans, head of tax policy at the Organisation for Economic Co-operation and Development (OECD), announced that an agreement on the establishment of a global digital tax would be postponed until mid-2021. The original deadline for the end of negotiations between 137 countries was the end of 2020. However, due to major political differences, particularly on which companies should be included in the new regime and whether the rules would be mandatory, as well as the effect of the COVID-19 pandemic, negotiators will need more time. As part of its announcement today, the OECD also published updated proposals for the two areas of its digital tax plan: Pillar 1 and Pillar 2.
In the past few years, the international community has been trying to reform the international tax system in order to address the digitalisation of the global economy. The new global digital tax regime, if adopted, will have an impact on various digital companies. Specifically, the main issue at stake has been the question of where multinational companies should pay taxes: in the country where they are headquartered or in countries where their customers reside. Over the past two years, the OECD has been tasked with designing a global compromise solution, with 137 countries participating in the negotiations. Since May 2019, the OECD has been hosting public consultations and negotiations to address the tax challenges of the digitalisation of the economy (Pillar 1) and to address tax avoidance through a global minimum tax (Pillar 2).
OECD’s proposals to address global tax
The first pillar aims to ensure big digital and multinational companies are taxed in the places where they generate profit, not where they book them. The OECD suggests targeting consumer-facing firms with a significant footprint around the globe, notably revenues of at least €750 million, and whose sales in each country reach a specific revenue threshold. It has been the more contentious OECD approach, with strong disagreements between the United States and several EU countries. The OECD’s second pillar aims to set a global minimum corporate tax rate to stop countries lowering corporate tax rates in an attempt to shift company headquarters to their jurisdictions. The second pillar has proven less controversial and discussions focus mainly on what that rate should be and whether there would be any exceptions. Despite ideas to decouple the two pillars in order to appease the United States and expedite the negotiation process, an agreement cannot be achieved without committing to both pillars.
On 12 October, Mr. Saint-Amans stated that while many of the details of these proposals have been already agreed upon, there are still difficult political choices to be made, including the idea of ‘safe harbor’ making the entire digital tax agreement optional, for which the United States has been negotiating. By accepting a safer harbor regime, governments would have the possibility to choose whether to adopt the rules or not, thus allowing companies to adopt or disregard Pillar 1 of the proposal.
The OECD will present the two blueprints at the meeting of G20 finance ministers on 14 October, for which a report is already available. Furthermore, today a public consultation was launched on the reports of the two blueprints, inviting stakeholders to send their written comments to the OECD by 14 December. Public consultation meetings on the blueprints will be held in January 2021, for which the OECD will publish registration details in December 2020.
OECD’s negotiations: state of play
In June 2020, the United States temporarily withdrew from the OECD negotiations due to the COVID-19 crisis, internal political disagreement and the upcoming Presidential elections. This withdrawal marked a peak in the tensions between the United States and France. In 2019, after France adopted a national digital services tax, the US government launched an investigation, determining that France’s digital tax was unfair because it was discriminating against US companies. The two countries reached an agreement and sanctions were not imposed pending the OECD negotiations. Following the United States’ withdrawal, France, the United Kingdom, Spain and Italy suggested a “phased approach” to the digital tax talks, allowing more concessions so that a compromise remains within reach. The details of such an approach, however, are still not clear. On 9 and 10 October, a final round of negotiations took place, aiming to reach a compromise between the opposing positions of the United States and its EU negotiation partners. Deputy U.S. Trade Representative C.J. Mahoney urged Europe to support an OECD deal and signalled that the United States would be able to engage more deeply with the negotiations after the Presidential election on 3 November. Following these negotiations, it was announced that an agreement on the global digital tax would be postponed until mid-2021.
EU’s position on digital taxation
According to the European Council conclusions on the 2021-2027 Multiannual Financial Framework and Recovery Fund, published on 21 July, the European Commission will present a proposal for the introduction of an EU-wide digital tax in the beginning of 2021 with a view to its introduction at the latest by 1 January 2023. The Commission expects the tax to bring €1.3 billion to the EU in terms of revenue, in case the ongoing OECD negotiations fail to deliver an international agreement by the end of 2020. The Commission’s intention to come up with a proposal for a European digital services tax in the beginning of 2021 has been reaffirmed by Commission President Ursula von der Leyen in her State of the Union address. Furthermore, on 4 September, during a meeting with national tax officials in the High Level Working Party on Tax Questions, the European Commission presented their plans to launch a new digital tax in the summer of 2021. The tax is meant to feed into the EU budget necessary for the recovery plans. It is not clear how the negotiations at OECD level will impact the EU digital tax, as some say that the tax will come regardless of the progress at OECD level, while the Commission officially states it will only come forward with a new tax proposal if OECD negotiations fail. Following the outcome of the OECD negotiations, it is possible that the Commission might postpone its proposal to allow OECD negotiations to conclude in 2021.
National Digital Services Taxes
A group of EU Member States and the UK have adopted national digital services taxes to remain in force until an international agreement is reached. In 2019, France started applying a 3 percent digital services tax on big tech companies with revenue of more than €750 million of which at least €25 million generated in France. After considering its suspension in January 2020 until the end of the year in the hope of an OECD agreement, Paris recently stated that, in wake of the COVID-19 crisis, such a tax is necessary and will not be suspended. Italy and Austria have been applying their own digital levies of 3 and 5 percent respectively, since January 2020, and the UK has approved a 2 percent tax applied from April 2020. Spain and the Czech Republic are currently in the process of discussing such taxes and the new Belgian government has announced it will start work on a national digital levy in 2023 in case there has been no progress on OECD or EU level beforehand.
The OECD proposal for a global digital tax regime will target automated digital services businesses and consumer-facing businesses such as search engines, social media platforms, cloud computing, content streaming and gaming, as well as online marketplaces and businesses selling goods and services to consumers online. It has been clarified that intermediate products and components for consumer products would be out of scope, with some remaining subject to possible exceptions.
Although, generally speaking, one can say that the target of digital taxes are normally large digital companies, the various ways in which these companies integrate the tax into their business models, may also have a direct impact on their business customers/users. With the unilateral development of digital taxes across Europe, some technology companies have decided to take on the additional costs themselves. However, other companies are going to announce price increases for their business customers/users as a result of the adoption of national digital taxes in some EU countries.
Dr2 Consultants continuously monitors the developments of the discussion on the new global, EU and national tax regimes. Should you be interested in further information on digital taxation and how it could impact your business, you can reach out to Dr2 Consultants at firstname.lastname@example.org or find more information on our website.