On June 12, 2020, the United States (“U.S.”) Secretary of Treasury issued a statement (“Statement”) requesting that the Organization for Economic Co-operation and Development (“OECD”) pause international discussions designed to address the tax challenges facing the rapidly digitalized economy. Mandated in 2018 by the G20 to deliver a consensus-based solution by the end of 2020, members of the OECD/G20 Inclusive Framework on BEPS (“IF”) developed a two-pillar approach (“Program of Work”) designed to deliver solutions to the tax challenges brought by digitalization. Pillar One focuses on the allocation of taxing rights and seeks to undertake a coherent and concurrent review of the profit allocation and nexus rules. Pillar Two focuses on the remaining BEPS issues and seeks to develop rules that would provide jurisdictions with a right to “tax back” where other jurisdictions have not exercised their primary taxing rights, or the payment is otherwise subject to low levels of effective taxation.
In the Statement, Secretary Mnuchin advocates that governments around the world should focus their attention on dealing with the economic issues resulting from COVID-19, claiming that attempting to rush such difficult negotiations is a distraction from far more important matters. Interestingly, while the Statement repeatedly disagrees with taxation of digital services, the Statement also indicates the U.S. intends to successfully conclude Pillar Two discussions during 2020. To date, the U.S. has consistently rejected adopting any measures that focus solely on digital business, especially gross-basis digital services taxes that fall predominantly on U.S.-based enterprises. As an overarching theme, the U.S. has historically rejected proposed reformations to international tax standards that place financial burdens predominantly on the business and fiscal interests of certain countries or industries.
What is lacking from the Statement is rationale for why a government cannot simultaneously address the COVID-19 crisis and move forward with the Program of Work. So, it is fitting that governments worldwide are rebutting Secretary Mnuchin’s Statement as being senseless. For example, the French Ministry of Economy and Finance offers that the current COVID-19 crisis has accelerated a fundamental transformation in consumption habits and increased the use of digital services, consequently reinforcing digital business models’ dominant position and increasing their revenue at the expense of more traditional businesses. The French Ministry of Economy and Finance concludes that digital service providers will emerge from the current crisis more powerful and more profitable. Thus, postponing Program of Work and not addressing these challenges would constitute a collective failure, and a multilateral agreement would actually alleviate the need for governments to take action.
On a more practical and less theoretical level, the OECD’s Secretary General maintains that, absent a multilateral solution, more countries may potentially take unilateral measures, which could trigger tax disputes and, inevitably, heighten trade tensions. Already, several countries have decided to move ahead with unilateral measures to tax the digital economy, including France, Spain, Italy and the United Kingdom. So, while Secretary Mnuchin can try to delay digital taxation policy from impacting U.S.-based multinational corporations in the short term through his Statement, it seems that mismatches in laws will ultimately become pricey for U.S. multinationals that operate in the digital economy.
For more information on international digital economy taxation considerations, please contact Ben Miller by calling 770.396.2200.