The BEPS 2.0 project aims to address taxation challenges arising from the digitalisation of the world economy and remaining concerns around base erosion and profit shifting (BEPS). The G20/OECD has been steadily working on the BEPS 2.0 project for over two years and is due to deliver its final proposals in July this year. However, the goalposts continue to shift for the BEPS 2.0 project. The COVID-19 pandemic, the diverse policy positions of the Trump and Biden administrations, the growing number of countries introducing digital taxes and the EU’s latest plans for a revenue generating digital levy have all introduced changing variables to the already complex task of international tax reform facing the G20/OECD. The US’s Made In America Tax Plan has the potential to accelerate the process of reaching consensus on international tax reform. All the factors leading up to the current crucial juncture in international negotiations are complex and will shape how corporates are taxed for years to come. In this article, I consider the work of the BEPS 2.0 project to date and the recent policy proposals from the EU and the United States.

G20/OECD international tax reform

Since 2019, 139 OECD and non-OECD jurisdictions have been working as the Inclusive Framework to develop international corporate tax reform for the digital age under what is commonly referred to as BEPS 2.0. This is a G20/OECD initiative. In October 2020, the Inclusive Framework released the Pillar One Blueprint and Pillar Two Blueprint, followed by a public consultation. Over 200 commentators across businesses, civil society, academia, and the non-government sector responded to the consultation. A public consultation meeting was held in January 2021 for commentators to elaborate on their submissions. The Inclusive Framework is currently working to refine and simplify the proposals with the objective of reaching a political agreement at the G20 Finance Ministers’ meeting in July 2021.

Pillar One aims to establish new rules on where tax should be paid (“nexus” rules) and a fundamentally new way of sharing taxing rights between countries. The goal is to ensure that digitally intensive and consumer-facing multinational enterprises pay taxes where they conduct sustained and significant business, even when they do not have a physical presence.

Pillar Two seeks to introduce a global minimum tax to ensure that large and internationally operating businesses pay at least a minimum level of tax. This is called the global anti-base erosion proposal (GloBE proposal).

The proposals under Pillar One and Two are highly complex. Both proponents and opponents of BEPS 2.0 are in agreement that the measures must be simplified. The OECD predicts that Pillar One and Pillar Two tax measures could increase global corporation tax revenues by about USD 50–80 billion per year. According to the OECD, the absence of a consensus-based solution would likely lead to a spread of uncoordinated and unilateral tax measures such as digital services taxes and an increase in tax and trade disputes which could reduce global GDP by more than 1 percent. In February 2020, Ireland estimated the BEPS 2.0 proposals could reduce the country’s annual corporation tax receipts by €2 billion a year by 2025, equivalent to 2.6 per cent of Ireland’s total annual tax revenues.

European Union digital tax plans

Earlier this year, the European Commission published a roadmap, including a public consultation for the introduction of a digital levy. The roadmap says that the EU is still committed to reaching a global agreement on the digitalisation of the economy, and the consultation aims to supplement the G20/OECD’s ongoing international corporate tax reform work. The European Commission is, however, also committed to publishing a draft directive by June 2021 and aims to introduce a directive in early 2023.

In a meeting of the European Council on 25 March, EU leaders stated, “the need to urgently address the tax challenges arising from the digitalisation of the economy to ensure that all operators pay their fair share of tax.” The European Council noted their “strong preference for a commitment to a global solution” on digital taxation, but “the EU will be ready to move forward if the prospect of a global solution is not forthcoming. We recall that, as a basis for an additional own resource, the Commission will put forward in the first semester of 2021 a proposal on a digital levy, with a view to its introduction at the latest by 1 January 2023.”

EU own resources are revenues applied across the EU to fund the EU’s budget. EU own resources currently consist of customs duties, a share of VAT from Member States, a contribution by Member States based on gross national income and from 1 January 2021, a contribution from EU countries based on the quantity of non-recycled plastic packaging waste. The recent statement from the European Council suggests that an EU digital levy is on the cards to fund the EU’s budget. The main objective of the OECD/G20 BEPS 2.0 project is to create globally agreed rules to tax the digitalised economy, and the 139 countries participating in the negotiations have agreed to abandon unilateral digital tax measures when and if a global solution is reached. The EU’s plans for a digital levy to raise revenue for the EU budget is the sort of measure that the OECD/G20 has said it wants to avoid.

The Commission must have its plans for digital levy agreed unanimously by the European Council. The success rate of the Commission’s direct tax proposals is not good due to concerns of tax sovereignty encroachment expressed by countries such as Ireland. An EU digital services levy failed in 2019, following opposition from Ireland, Finland and Sweden, among others, to a planned 3 percent levy on companies earning €750 million in revenue and at least €50 million in turnover from taxable digital services provided within the EU. At the time the original digit levy was floated, it was estimate that Ireland could lose up to €160 million a year in tax revenue. However, the Commission is persistent, and once it has a tax policy measure in focus, it tends not to drop it. The €750 billion pandemic recovery fund will have to be financed, and this fact may make it difficult for Member States to block revenue-raising proposals.

Several countries, including the UK, France, Spain, Italy, Austria and Hungary, have already introduced digital service taxes targeting the digital multinational companies, which the US views as discriminatory against American business interests. The US is now preparing to hit six countries imposing digital service taxes with retaliatory tariffs. The United States Trade Representative, Katherine Tai, recently said that the US remains committed to reaching an international consensus through the OECD process but will maintain its options, including the imposition of tariffs.

US minimum global tax plan

The initial engagement from the Trump administration with the BEPS 2.0 process was positive; however, US participation in the Inclusive Framework stalled last year. Then the US Treasury Secretary, Steven Mnunchin, wrote to the OECD proposing to implement part of a global tax reform plan on a voluntary, safe harbour basis which was not supported by other Inclusive Framework members such as France. In June 2020, the US pulled out of the talks citing the need to focus on the pandemic. However, President Joe Biden’s administration says it is no longer interested in pursuing the safe harbour basis and now suggests a global minimum tax rate beyond the rates flagged under Pillar Two.

President Biden recently announced the “American Jobs Plan”, which is a two trillion-dollar capital investment programme in infrastructure, manufacturing, and research and science. Alongside the American Jobs Plan, the President is proposing the “Made In America Tax Plan” to “fix the corporate tax code so that it incentivises job creation and investment in the United States, stops unfair and wasteful profit shifting to tax havens, and ensures that large corporations are paying their fair share”. The America Tax Plan is tackling corporation tax reform at both a national and international level. The Plan states that the US will support a global agreement on a strong minimum tax through multilateral negotiations to “level the playing field and no longer allow countries to gain a competitive edge by slashing corporate tax rates”. The Plan also seeks to double the tax rate on Global Intangible Low Tax Income (GILTI) earned by foreign subsidiaries of US firms from 10.5 percent to 21 percent and impose it on a country-by-country basis. The 21 percent minimum global tax rate goes significantly further than the 12.5 percent signalled under Pillar Two.

President Biden’s Made In America Tax Plan must be passed by Congress, and it remains to be seen how much of the Plan will translate into new US tax laws. However, the US’ renewed commitment to BEPS 2.0 is important given the fact that US multinationals will be impacted substantially by the reforms, and the Biden administration’s position appears to be that tax reform is necessary at both national and international levels in achieving its goal of raising taxes and putting an end to harmful tax practices.

Conclusion

The appetite for international tax reform is stronger than ever. Tax is highly complex, and international tax transactions are even more so. The G20/OECD initiative has been given a boost with the far reaching proposals in the Made In America Tax Plan. The US has demonstrated that it is ready and able to apply retaliatory tariffs on countries forging ahead with digital taxes so there is no doubting the world-wide impact for multinationals if consensus is not achieved. Will the European Commission take the digital levy off its agenda for once and for all if the US proposals are incorporated in the Inclusive Framework’s July findings? How will Ireland respond to international tax reform? All these questions will be resolved in time. However, we cannot lose sight of how much fundamental change international tax reform will bring. Corporates, governments and tax authorities all over the world will need time to consider how the new consensus-based international tax policy can be implemented into domestic tax law and tax administration. Corporates will also have to put new processes and procedures in place on top of getting to grips with the new tax laws. Current rules on the taxation of corporates are in place for over one hundred years. Consensus on international tax reform must be followed with a sensible lead-in time for implementing the changes.

Norah Collender is Professional Tax Leader with the Advocacy and Voice Department of Chartered Accountants Ireland