Addressing the tax challenges of the digital economy has long been a focus for governments and the OECD. But, as the COVID-19 pandemic shifts BEPS 2.0 discussion timelines and with mounting pressure from unilateral measures, Barbara Angus, EY Global Tax Policy Leader, provides insight into what’s been accomplished in 2020 and what’s still ahead for the project in 2021
Two days before the October meeting of the G20 finance ministers and central bank governors, over 800 pages of documents were released in the G20/OECD’s project on addressing the tax challenges of the digitalisation of the economy. The main documents are detailed technical blueprints with respect to both the Pillar One work on revising long-standing nexus and profit allocation rules to increase the taxing rights of market countries, and the Pillar Two work on developing new global minimum tax rules to ensure that all cross-border business income is subject to at least an agreed minimum rate of tax.
The October documents reveal how much progress has been made on the design of new rules under the two pillars since the last major release in this project, which is known as Base Erosion and Profit Shifting 2.0, but at the same time the documents show just how much work is still to be done.
As the Organisation for Economic Co-operation and Development foreshadowed in recent months, the 137 jurisdictions engaged in this project as members of the Inclusive Framework have not yet achieved the G20 goal of a consensus-based solution in 2020. However, that target date was very ambitious given the complexity of the technical, policy and political matters that need to be resolved in a manner that satisfies the broad spectrum of perspectives on the project across Inclusive Framework members. The cover statement from the Inclusive Framework describes the blueprints as providing a solid basis for future agreement and indicates that Inclusive Framework members have agreed to work to swiftly address the remaining issues with a view to bringing the process to a successful conclusion by mid-2021. This extension was effectively endorsed by the G20 finance ministers at their recent meeting, with the communiqué referring to the goal of a global consensus-based solution in that period.
COVID-19, new challenges hinder BEPS 2.0 progress
The circumstances surrounding the COVID-19 pandemic created major hurdles in advancing the BEPS 2.0 work in 2020. The project schedule shifted almost overnight, from in-person sessions to all virtual meetings, with the government participants juggling this work and the demands of work on economic relief and stimulus programmes developed in response to the crisis, and delivered to a great extent through the tax system. The technical details spelled out in blueprints are a testament to the effectiveness of the new ‘work from anywhere’ paradigm. At the same time, however, it is clear that these circumstances have not been as conducive to progress on resolving the significant political differences, where old-fashioned face-to-face conversations and undivided attention continue to be critical. As we look ahead, it remains to be seen how the ongoing work on BEPS 2.0 will be affected by governments’ evolving tax policy priorities as they balance the need to provide economic stimulus to drive growth with the need to put their fiscal houses in order after the massive spend on COVID-19 response measures.
The pressure of unilateral measures is another challenge for the BEPS 2.0 project. Indeed, one of the project’s objectives is to fend off – or roll back – uncoordinated unilateral measures, such as the adoption of digital services taxes by governments that see an urgent need to address the potential for businesses to serve local markets with no local presence. The steady stream of new DSTs has grown since BEPS 2.0 began, with Spain taking the final steps to enact a DST just days after the release of the blueprints. In the past, new DSTs were explicitly intended by the enacting governments to be just a temporary solution while a coordinated global solution was being developed. With some of the more recent DSTs, however, there has not been a clear signal that the tax is intended to be temporary. Moreover, while OECD documents have described elimination of inconsistent unilateral measures as a necessary element of any consensus on Pillar One, more detail is needed on how the determination of inconsistency would be made and on the mechanism for ensuring the withdrawal of such measures. A shared concern is that a DST or other new unilateral measure that is put in place would be hard to dislodge, especially in this global environment of mounting government debt and deficits.
The BEPS 2.0 project is now heading into a public consultation phase, with stakeholders invited to submit written comments on the blueprints and participate in a virtual consultation meeting to be held in mid-January. It is important for businesses to take this opportunity to actively engage with policymakers on the implications of the fundamental changes under consideration.
As political discussions of BEPS 2.0 resume in early 2021 with a new but still ambitious deadline, it is essential that the Inclusive Framework takes the time to fill in the technical details, resolve the areas of difference and consider all perspectives in order to ensure true consensus.
The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organisation or its member firms.