Is the mood for international corporate tax reform waning?

The US had also very publicly pulled its support for the World Health Organisation and in more recent days it has sowed confusion as one of its representatives, Robert Lighthizer, said it was pulling out of OECD talks on a new global tax framework.

More on that in a minute, but for now a question – is the momentum for international corporation tax reform as sponsored by the OECD on the wane?

The organisation‘s work on the international corporation tax rules has a resonance with current public sentiment against the legacy of empires. The current cross-border corporation tax rules were formulated by the British Empire. The tax from great wealth being produced by corporations in the colonies was not ascribed to the colonies. Any company making its money anywhere in the British Empire had to pay its taxes in London and that was the end of the matter.

International tax law has largely stuck with principles that result in tax being paid where the company is incorporated, managed and controlled. This might have been defensible in an era when it was made from digging stuff out of the ground and manufacturing products, but it is increasingly inappropriate in a world where goods are internationally traded and cross-border services are provided, the latter often without need for any physical movement of either people or goods. This is why the international debate has focused so much on how the digital economy should be taxed.

The OECD's approach to overturning the colonial method of taxation involves two objectives, or “pillars” in the jargon. The first pillar focuses on the digital economy. Subject to terms and conditions, the idea is that the profits of some companies should in part be taxed where their products and services are sold. The businesses that would be caught include those which provide content streaming and online advertising, or remote sales of goods and services to consumers. The second pillar is that there should be an effective minimum rate of corporation tax payable by all companies irrespective of where they are located.

With more than 130 countries involved in the OECD negotiating process, these objectives have garnered some momentum. If the process becomes fragmented, it could push countries to create their own new tax rules outside of an international consensus approach. The EU institutions are also susceptible to promoting rule change, overlooking the inconvenient reality that the EU does not have the power to establish a corporation tax regime for its member countries.

It appears that the US position on the OECD discussions is considerably more nuanced than has been widely reported. Writing to the finance ministers of France, Spain, Britain and Italy just two weeks ago, Steven Mnuchin, the US Treasury Secretary, clarified that the pillar one ideas should, in the view of the US, only apply as a default taxing position when all else fails. He also pointed out that the world may perhaps have better things to be doing than agonising over international tax rules when it should really be focusing on economic issues resulting from Covid-19.

He wanted pillar one discussions “to pause” with a view towards resuming later in the year. His assessment of where matters stand in relation to pillar two, the global minimum tax, was that discussions have progressed more rapidly and could be concluded by the end of the year.

This assessment is reasonable given that the US has particular cause for concern over pillar one. Due to the American dominance of the digital industry, a significant amount of tax revenue could be displaced away from the US and into other countries. Therefore, as regards digital taxation, it is in the short-term interests of some economies to go it alone. If they do, the US has an answer for that as well.

America has a process known as a section 301 investigation, somewhat similar to the EU's competition investigations. Some weeks ago the US opened section 301 investigations on the digital tax proposals of a number of authorities, including Italy, Spain, the EU itself and Britain. It appears that these so-called anti-trust investigations enjoy bipartisan support in the US and are likely to persist irrespective of who is in the White House in 2021. If a response is deemed necessary, the US has plenty of tax and trading remedies at hand to counter any country’s attempts to unilaterally levy tax from American owned companies.

Despite the recent suggestions to the contrary, the OECD is still in the tax policy arena. Their processes may have slowed as a result of the recent US intervention, but they have not stopped. The current programme for government states that Ireland should continue to support OECD efforts to arrive at international consensus on taxing methods. Mnuchin‘s letter in combination with the new section 301 investigations suggests that the US is taking the same approach.