The driver of change

Norah Collender, Professional Tax Leader at Chartered Accountants Ireland, speaks to the OECD’s Pascal Saint-Amans about tax reform, climate change, and supporting growth beyond the COVID-19 crisis.

First of all, it has been a busy 2021 on the tax front. Aside from the historic agreement for BEPS 2.0 Pillar 1 and Pillar 2, what are the highlights for you?

There is no other; that is the highlight. It was the culmination of years of work and has cannibalised the overall tax agenda.

To say that the agreement of 137 jurisdictions and the agreement by G20 nations to international tax reform spearheaded by the OECD is momentous is an understatement. The theory of Pillar 1 and 2 is taking shape. However, nations are now turning to the logistics of the agreement. When do you realistically see Pillar 1 and Pillar 2 rule changes being implemented at national level?

There is a timeline that the political masters have set, so I can only repeat what you will find in the implementation plan as endorsed by the Inclusive Framework and the G20 leaders and finance ministers. The aim is to get all of this into force in 2023, which means that we need to come up with model rules for the implementation of Pillar 2 by the end of November this year and have a multilateral convention ready for signature by the first half of 2022.

Then, the nations must get down to business and look at the multilateral instrument and how they can reflect it in their national legislation.

The multilateral convention doesn’t have to be reflected in domestic legislation because it is an international instrument. It depends on whether you are a monist or pluralist, but fundamentally, the need to ratify this instrument is more about Pillar 2, which must be translated into domestic legislation. We expect the European Union to move this year fast. We already know that the French presidency of the European Union aims to get this approved in the first quarter of 2022.

Yes, the European Commission has been very supportive and is moving ahead with it. Can you comment on the relationship between the OECD and the EU and what involvement the OECD might have in assembling the EU Directive to give effect to Pillar 1 and Pillar 2? And do you think that the EU may go beyond the principles agreed at OECD level?

First, you cannot put Pillar 1 and Pillar 2 in the same basket. As I indicated, Pillar 1 will be translated by multilateral convention, so it’s not about a directive. Nobody is thinking of that. Second, as regards Pillar 2, the agreed way forward is that the OECD will develop model legislation. The EU will probably turn this into a directive that countries will have to implement.

It’s not expected that the EU will depart from what has been agreed with the OECD; I don’t think that the European Commission intends to do such a thing. And countries like Ireland made it clear that they will make sure that the directive is fully compliant with the OECD agreement, so there is no worry or concern on that front because that is the common understanding.

Following that same topic of the logistics of large-scale international tax reform, has the OECD carried out any up-to-date costings on how much investment hubs like Ireland could gain or lose in tax revenues on implementing the reform measures?

Yes, we have. We have done a detailed piece of work, but the estimates belong to the members. We have not communicated on the country-specific estimates coming out of our impact assessments, and I will not start now because these belong to the members, and we have done the work with them. The only exception is when countries that have not joined the agreement claim that it didn’t bring any money to them. We had to say that this position was incorrect, and we gave the figure for Kenya and Nigeria, but we haven’t shared the detailed figure. We have also provided the overall figure, which is $150 billion of additional revenue for Pillar 2 and $125 billion of shifting of the tax base for Pillar 1.

Ireland has the estimates from the OECD, but Ireland also has its own estimates. The estimates from the OECD for Pillar 1 are based on the macroeconomic approach, which may no longer be relevant. Countries have much more granular information. What we try to do at the OECD is provide countries with a common methodology to allow for a common approach and a shared understanding of the issues. So the other reason we have not communicated the granular data on a country-by-country basis is because it may need some updating.

Pillar 1 implementation requires treaty adjustment via a multilateral instrument. How realistic is it that countries which are slow to make new treaties, particularly the US, will adopt the multilateral instrument in a reasonable timeframe?

Is it difficult? Yes, it is difficult. It would be extremely naïve to pretend that getting the US Senate to ratify a multilateral dimension related to tax is an easy task. But just because it’s difficult doesn’t mean it can’t happen. Everybody thought that the deal would never land, that there would never be a political agreement. We delivered the political agreement. Everybody thinks that we cannot deliver a multilateral convention, but I am confident that we will deliver a multilateral instrument within the timeline. Everybody says that the US would never ratify, and that’s not the working assumption. The working assumption with this administration and the previous administration, which was a Republican administration, has been that Pillar 1 would require a multilateral convention, and that was the working assumption of the Trump administration when they negotiated Pillar 1.

So, is it difficult? Yes, obviously. Is the US a country with a separation of power almost unique in the world, making it very difficult to translate into domestic legislation the political agreement reached by the Executive? Yes, absolutely. Is it impossible? No, it’s not impossible, and we will try to meet all the conditions to make it not only possible but done. And I think the odds have never been more positive to get ratification. 

And what if Congress doesn’t support President Biden? Is the agreement strong enough to survive without the US?

I would make two different responses. One is that it’s not the working assumption. We don’t work on the assumption that the deal is impossible because the US might not ratify it.

The second answer, on a more personal note, is the international tax system needs a fix. This, I think, is the last nail to fix it after BEPS. My take is that whether it is ratified in the next six months or nine months or not doesn’t change the fact that this reform, one day or another, will be implemented. There is no way back to the old world.

There will be challenges with the implementation of Pillar 1 and 2 at national level. Businesses within the scope of Pillar 1 and Pillar 2 also face substantial challenges in resourcing reporting obligations and corresponding systems changes – and, of course, increased tax bills. When Pillar 1 and 2 are in place, can business get any assurance that this is it for the foreseeable future in terms of international tax reform or are more changes on the horizon?

I don’t see more changes on the horizon, frankly speaking. Precisely for the reasons we’ve seen. It’s a big deal, it took a lot, its aim is to stabilise the system. I don’t buy the stuff about increasing the cost of compliance. It will reduce the spend on expensive tax lawyers to make tax functions a profit centre, so if companies were slightly more reasonable, they could save a lot of money. The increased cost is due to the fact that these companies have aggressively planned and have located their rent in countries where it didn’t really belong. And that’s the cost, but that’s precisely what governments said is no longer acceptable, and that’s why you have this move. When you look at the end result and not the narrow-minded tax perspective of tax lawyers always trying to find the new game in town, they should understand that the world has changed. They will be better off investing in compliance rather than trying to find the loophole and then claim that all of that is extremely expensive. That is a little old-fashioned, I think.

Members of Chartered Accountants Ireland supported Pillar 1 but found the implications of Pillar 2 in terms of the loss of tax sovereignty very concerning. The OECD is not a democratically elected body and has taken its mandate from the G20 to design tax rules that erode the tax sovereignty of small open countries like Ireland. What is your response to these concerns on loss of tax sovereignty and the role played by the OECD?

First, I think there are two serious flaws in what you have said. One, the OECD is an international organisation made of members who are sovereign and who agree roles in a sovereign manner. Second, we don’t take mandates from the G20. The G20 can mandate us, but it is first and foremost the OECD itself that decides what it does, whether the G20 asks for it or not. So, I think we need to be clear. If we want to talk about sovereignty and mandates, we need to get it right.

If we move on to the more political approach, for the past 30-40 years, you have had globalisation without any form of tax regulation. So, the international tax rules were developed one century ago in an economy where you had tax sovereignties in closed economies. And that’s when Keynes did his theory, which works in closed economies. The world has changed. We’ve had globalisation, it was a political choice. But what didn’t go with globalisation was some form of tax regulation, which means that the countries kind of gave up their tax sovereignty because in an open economy, if you don’t have any tax regulation, countries lose their sovereignty to those who are more competitive like Ireland, Luxembourg, the Netherlands, Singapore, and some others. And these countries were absolutely right to get in that game, because that is what the system was designed for.

Now, when you have a global financial crisis waking up countries and waking up people against globalisation, the taxing countries realised that their sovereignty had gone. But nominally, they could still exercise it and they decided to go back to exercising their sovereignty. You have two ways of exercising your sovereignty in times of crisis. One is to shut down the borders and implement withholding taxes, terminate your tax treaties, and take unilateral measures against others. Or if your tax treaties don’t allow you to do so, implement transaction taxes and such because they are sovereign – like Ireland is sovereign. So that is the non-cooperative game, which is really bad for everybody.

Or you try to find a cooperative game, telling those who took a lot of advantage over the tax competition – they were the winners of the unregulated game – “Listen, we need to rebalance this and do it in a cooperative manner, meaning a common set of rules”. And this is what has happened. The countries that agreed implicitly to give up their sovereignty because they are high-tax countries and benefited from globalisation at some point said: “We are no longer benefiting from globalisation. Not only are we no longer benefiting from it enough, but we are also facing a political crisis of confidence in globalisation”, which explains why you have populist movements here and there.

The response was either some form of tax war or some form of tax cooperation. It is true that in that dimension, those who benefited from unregulated globalisation will benefit less. And that’s a serious issue for Ireland and the small open economies, but that’s the reality of the game and you perfectly know it.

We do have an entitlement to design our own tax rules, however.

But you are, and other countries are. You remind me of the conversation with the Swiss when we started attacking bank secrecy. They said: “We are entitled to do what we want”. Yes, you are. And the French or the Germans or the Americans are entitled to put an end to that tax treaty with you. They’re not obliged to have a tax treaty, nor are they obliged to let money go to Switzerland without a withholding tax. They’re entitled.
When you’re sovereign and when you claim your sovereignty, you better recognise the sovereignty of the others. You cannot have your cake and eat it. Either you are sovereign, and you recognise that the others are sovereign also, or you recognise that you better regulate these frictions between sovereigns.

It’s not only the big countries dictating their laws to the small countries. The small countries had their say, participated, and helped shape it.

Given the intense focus on climate change, what role will tax play in helping the world meet the COP26 climate goals?

As we are talking about tax, the link between tax and climate change is the price of carbon. Climate change is largely due to carbon emissions, and carbon emissions today are not priced. Now, the price of carbon emission can be determined through tax or an emission trading system (a market mechanism). There are markets and so be it, and there are some taxes, but clearly when you combine them both, more than half of carbon emissions are not taxed, are not priced. And that’s clearly extremely worrying.
What we can expect in the years to come is that countries will have – if they really want to fight climate change – to put a price tag on carbon. And we know that the price tag is not €4 (I mention €4 because that is the average price of the emissions that are priced). A bit more than half of them are not priced, and for what is priced, the average is €4. I think the minimum economists would agree on is at least €60 per tonne.

So, to respond to your question, the role of tax will probably be to help price carbon emissions, and this is something that is extremely difficult politically. The French know about that with the Yellow Vests. We can see price hikes in energy prices today and telling those who struggle to heat their house or to fill the tank of their car that it will increase further because of a carbon tax is extremely difficult, but necessary.

The real question on that front, I think, is how do you organise the political economy of that reform? And the second big question is the competitive impact on economies. That is the question of the EU, which wants to move towards more carbon pricing through a combination of tax and an emissions trading system. But if you have a country, or a group of countries, with a high level of price for carbon, then you have a risk of leakage. So, you have on the one hand the social impact of the reform on the political economy and on the other hand, the competitive dimension and the risk of leakage, which drives you to think of a carbon border adjustment mechanism, which itself can trigger some trade tensions.

We are in the following conundrum: climate change is happening. It’s urgent to address it. It will not be addressed without pricing carbon. Pricing carbon means either tax or market, but tax will be part of the equation. However, taxing carbon is extremely difficult, both domestically and internationally. And that’s why we at the OECD think that we must provide a platform, an inclusive framework, to talk about that, to bring countries together and to find a common path forward while not preventing those countries willing to move faster from moving faster.

It isn’t carbon tax for the sake of it, however. It must be to drive behavioural change. Is there any role for the tax system to incentivise, subsidise, and help develop new technologies? Is the OECD looking exclusively at the carbon tax, or is anything being considered on the incentive side?

That’s a good question, and one I don’t have the answer to. We clearly need to work on that. Tax incentives to facilitate technological innovation is indirectly part of carbon pricing and is probably something to explore. But if we go back to the basic economic mechanism, as long as you don’t internalise the negative externalities – that is the mantra of the economists – but as long as you don’t factor the negative impact of carbon into the price of goods, the related prices will not send the right signal. Therefore, the long-term investment in less intensive carbon products will not be made.

So, you can do tax expenditure to facilitate investment in carbon-free technology, but if the price of plastic imported from China does not reflect the intensity of carbon, that may just be a wasteful tax incentive. You really need to adjust the price in the long-term, and I think that’s the main challenge.

The OECD recently published a report titled Tax and Fiscal Policies After the COVID-19 Crisis. Ireland, like other countries, has amassed substantial debt to fund public spending on supports throughout the crisis. Ireland is following OECD advice by not increasing taxation and maintaining supports for as long as needed. What tax policies should an economy like Ireland put in place to support inclusive and sustainable growth beyond the COVID-19 crisis?

That’s a very good question. The OECD can advise governments and can give some sense, but the basic line is that it is for the governments to decide what is best for them. We do a lot of tax policy advice, but I am always humble and cautious in what we can tell countries. It is very easy from Paris to say you should do this or that, but the political economy of reforms is extremely difficult.

I see two or three challenges from the outside. One is the impact of COVID-19 on the debt level, even though our line is don’t rush to fiscal consolidation to pay the COVID-19 debt because that will not make it. The best way to pay back the COVID-19 debt is to have growth, so don’t kill growth with overly aggressive tax policies. Second, you need to take advantage of the COVID-19 crisis to address the fundamentals of the economy. Ireland also has an ageing population. That is a serious challenge in the long-term and is something you need to incorporate into tax policies. The fact is that the contribution from labour will decrease, and pensions will become more expensive to bear as a cost for the State. And there is also what we’ve just discussed, which is the climate change dimension.

In Seamus Coffey’s report, you also had the advice not to be overly dependent on corporate income tax revenue. I think that’s absolutely true, so that would definitely be one of the recommendations. There is room for manoeuvre in Ireland and moving towards a more environmentally friendly tax environment, which we have discussed, is important. But again, the political economy of these reforms is difficult.

The workload isn’t slowing down for the OECD. You are working on introducing a digital transformation maturity model and that’s going to be a benchmarking system for developing countries. Is this linked with Tax Inspectors Without Borders? Is the desire to support developing economies in implementing a proper tax structure?

You’re very well informed. Yes indeed, the work is done through the Forum on Tax Administration (FTA) and what we call the maturated model, which is a way to allow members (tax administrations) benchmark themselves without going public to say this country is doing well and that one is not. We try to provide a matrix with which they can evaluate where they are advanced, where they are lagging, and draw on best practices. That’s true for developed tax administrations because you have very different approaches, and they can take advantage of what is done better elsewhere.

But you are absolutely right. Developing countries can benefit from that, especially as developing countries are experiencing interestingly a move from a paper-based administration to what we call ‘Administration 3.0’ where everything can be on an app, including the payments. That’s an opportunity and yes, we are thinking of possibly using Tax Inspectors Without Borders (TIWB) to assist developing countries, even though it’s not the core business of TIWB, but we may use TIWB to provide a better service. TIWB works pretty well by the way, and Ireland helps on a couple of cases.

Yes, the Irish tax authority is involved and is a forerunner in the digitalisation of tax technologies, collection, and administration. In our view, measures like this will contribute to the tax justice agenda for developing countries, so it is a good development. Thank you for your time, Pascal.

Thank you also.