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Consensus solution critical for stable global tax system
With 2019 upon us, Japan takes the reigns of the G20 presidency and the Asia-Pacific region takes up a leading role in the digital economy taxation debate. The widely held expectation is that a consensus solution on how to redesign the international tax system to apply effectively to both digital and "bricks and mortar" businesses will be agreed at the Osaka G20 summit in June, but the next six months will be critical in determining the shape and success of such reforms.
Achieving consensus has thus far eluded international tax policymakers, most notably the Organisation for Economic Co-operation and Development (OECD), which has found itself in the midst of a geopolitical battle with its calls for a consensus-based, long-term solution challenged by rival, short-term propositions. The most notable of these has come from the European Commission, although unilateral measures either proposed or implemented by India, the UK, Spain, Mexico, Italy and France have also challenged the OECD's pre-eminence over international tax matters.
NEW PERSPECTIVES TO SHAPE CONSENSUS
With the European Commission currently unable to agree on an approach to digital economy taxation, the OECD for now appears to have won some valuable clear air to drive its own solution. In developing this solution, the OECD's Task Force on the Digital Economy is operating under the auspices of the "Inclusive Framework", which opens the OECD tent for the first time to the views of over 120 countries to participate on an "equal footing" in the development of its proposals.
Collaboration on such a scale is unprecedented, and brings with it perspectives that have not been traditionally aligned with the 36 full OECD members. Asian countries are front-and-centre of the Inclusive Framework, with its steering group including Singapore, India and China - all countries that are not standing members of the OECD and have not previously had a strong voice in OECD-related matters.
The US, itself a steering group member, has been particularly vocal on the need to achieve consensus. US Treasury Secretary Mnuchin has noted the strong opposition to approaches involving "unilateral and unfair gross sales tax", urging countries to "finish the OECD process".
Similar, albeit more tempered, views have come from China's deputy finance minister, Guangyao Zhu, saying that all G20 countries "should pay attention to the potential impacts of the unilateral and temporary tax measures" and the "G20 should reach a consensus on long-term solutions to the taxation of digital economy".
Akhilesh Ranjan, India's principal chief commissioner of income tax, noted in 2018 that the development of India's significant economic presence principle was a concept that India hoped other countries would build upon to achieve consensus.
For its own part, Japan has historically staunchly supported a consensus-based approach in international tax matters.
Few would have predicted that this combination of countries may guide the path to obtaining consensus on digital economy taxation, although their common desire to achieve consensus gives renewed hope that a consensus solution will be agreed in Osaka.
Despite the challenges in consolidating the views of its expanded constituency, the OECD has arrived at a number of important conclusions in relation to the taxation of the digital economy, including distilling the range of solutions into two "pillars", the first relating to the allocation of taxing rights and the second involving a potential minimum tax.
It's possible that the first pillar involving a reallocation of taxing rights based on the value of marketing intangibles is the most likely to gain momentum. The fact that this approach is not a sector-specific tax makes it something the US can support.
Further, the concept of "market" as a driver of value has been consistently supported by India and China, who argue that the unique features of their markets means they deserve a greater return. This is also not a major leap for countries such as Spain, the UK and Australia as they have already bought into the idea that users in their market create value. One of the many questions of this approach is the extent of the concept of "market intangibles", such as whether it would encompass market specific features (such as workforce or goodwill) or whether it be determined purely by the number of users or customers in a particular market.
A minimum tax proposal also cannot be ruled out. Germany and France, along with others, have advocated strongly for global minimum taxation, spearheading recent proposals coupling a tax on base-eroding outbound payments (similar to the US BEAT provisions) with an income inclusion rule for cases involving controlled foreign companies (similar to the US GILTI provisions).
The Inclusive Framework meets this month and the OECD is expected to release an update to its March 2018 Interim Report on the Tax Challenges of the Digital Economy in June 2019.
The OECD has expressed hope that at the G20 summit in June, it will be able to "celebrate an agreement on the what and how of a long-term solution to be delivered in 2020". The development of a consensus solution at this summit will be critical to the ongoing stability and certainty of the international tax system.
- The writers are from Baker McKenzie Wong & Leow. Allen Tan is head of tax, and Tom Roth, senior associate.