OECD: coronavirus to increase focus on taxing digital economy

The international body said in a new report that although many businesses are facing unprecedented difficulties during the crisis, digital companies may see profits rise. In addition, it said that the expansion of remote working and the shift towards digital commerce during the crisis may mean that more economic activity moves online.

The OECD was reporting on the contribution that tax and fiscal policy could make towards covering the costs of the coronavirus pandemic, after considering the measures that individual governments have taken in response.

The OECD said that increased use of digital services and the need to expand revenue raising as a result of the pandemic "could provide new impetus" to efforts to reach agreement on international proposals to change the way MNEs are taxed.

Tax expert Eloise Walker of Pinsent Masons, the law firm behind Out-Law, said: "Many consumer facing businesses will be disappointed by this aspect of the OECD's latest report".

"There were some indications a few short weeks ago that the OECD was looking to help consumer facing businesses recover from the Covid-19 crisis more quickly, perhaps by carve outs from the pillar 1 proposals," she said. "However, this latest report appears to suggest the opposite, with a full steam ahead expected, to expand the scope of existing unilateral measures to hit a wider range of brands."

"If the OECD is serious about carve-outs, this report is a missed opportunity to make that clearer," she said.

In May 2019 the OECD agreed with the G20 a programme of work to come up with proposals to reform the international tax system to address the challenges of the digitalisation of the economy. This programme of work was divided into two 'pillars'.

Pillar one addresses the allocation of taxing rights between jurisdictions and considers proposals for new profit allocation and nexus rules. Pillar two is the 'global anti-base erosion' (GloBE) proposal which seeks to develop rules that would provide jurisdictions with a right to tax where other jurisdictions have not exercised their primary taxing rights or the payment is otherwise subject to low levels of effective taxation.

The original aim was for the OECD to reach international agreement on its proposals by the end of 2020. Work is continuing on the project, but it is not yet clear whether this timetable is still achievable in light of the pandemic.

The pillar one proposal adds new taxing rights on top of the existing system, targeting all multinational enterprises with consumer facing businesses and not just technology companies. Under the proposal normal routine profit would continue to be divided up between nations on existing principles. However, an extra layer of deemed residual profit ('Amount A') would be divided up according to a new methodology between all the countries where the MNE operates, so-called 'market jurisdictions'.

"The focus of the work on companies with high levels of profitability should facilitate revenue raising without negatively impacting the recovery of companies that have suffered heavily from the crisis," the OECD said in its report.  

"Rising pressure on public finances may strengthen the push for effective minimum taxation of MNEs. Where some countries may need to engage in difficult fiscal choices after the crisis, the demand for effective global implementation of the GloBE proposal under Pillar 2 will be higher, not least to ensure that there is a level playing field in the levels of effective taxation between major MNEs and SMEs who may suffer disproportionately from the crisis," the OECD report said.

The OECD warns that failing to reach international agreement on digital tax could result in unilateral action on digital taxation and the disruption of the international tax and trade agenda.

A number of countries are already introducing digital taxes. The UK's new digital services tax (DST) came into force on 1 April. DST is charged at 2% on the UK-derived revenue of social media platforms, search engines and online marketplaces. It is payable by businesses whose global revenue from in-scope business activities is greater than £500 million and where more than £25m of that revenue is derived from UK users.

The OECD stressed that, in the aftermath of the pandemic, cooperation between countries will  be even more essential "so  tax disputes do not turn into trade wars which would harm recovery chances further". It said that progress will also have to be made on increasing tax certainty, by improving dispute resolution and prevention mechanisms.

"It is good to see the OECD pushing a collaborative agenda, although it may be somewhat naïve of them to suppose that agreement on a way forward on pillar 1 and 2 will still walk hand in hand with better dispute resolution procedures," said Eloise Walker. "If anything, the additional economic stresses imposed by Covid-19 will make it more likely that governments worldwide will want consensus on the new taxing rights themselves, but a weak as possible dispute resolution system, so that MNEs, and not governments, bear the pain of the resultant double taxation."

In December 2019 the US threatened to impose 100% tariffs on champagne and a number of French luxury goods, in response to France's introduction of a digital services tax. France has since agreed to suspend collection of its digital tax, in return for the US not increasing tariffs and continuing to engage with the OECD.

The OECD report also considered other tax responses to the coronavirus crisis, suggesting that exceptional tax measures could be contemplated. It said that carbon pricing tax measures could combine revenue raising objectives with a more fundamental, long term structural reform.

There is evidence that introducing new taxes is less difficult at a time of major policy reforms, as it allows for the impacts of a wide range of policy measures to be balanced, according to the OECD.

The OECD also considered the impact of the crisis on developing countries, saying that work to build effective tax systems is essential and that many developing countries will need to increase their tax-to-GDP ratios. Average tax-to-GDP ratios in Africa are around 17%, compared to an average of 34% in OECD countries, according to the report.

Although the OECD's base erosion and profit shifting (BEPS) project has introduced changes to the international tax system aimed at reducing international tax avoidance and evasion, the report said low income countries are increasingly voicing their concerns that they are not benefitting fully from the tax avoidance tools that have been developed.

"Five years after the BEPS Project, and ten years after the establishment of the Global Forum, the time is right to assess the benefits for low income countries," the OECD said. "This stock taking exercise may be an opportunity  to  re-examine  how  international  tax  rules  currently  meet  the  needs  of  developing  countries."