Govt and businesses want greater tax certainty, says Grace Perez-Navarro

The Organization for Economic Co-operation and Development (OECD) has been at the forefront of international negotiations in adopting a “Unified Approach” to tax large and highly profitable multinational enterprises, including digital companies. The OECD is seeking public comments on its proposals to arrive at a global framework to tax firms based on where they have significant consumer-facing activities and generate their profits. Grace Perez-Navarro, deputy director of the OECD’s Centre for Tax Policy and Administration, tells Sudipto Dey how the proposed tax regime would look like. Edited excerpts:

How would the new global tax regime look like if the proposals are accepted by all countries?

There are fundamental changes that are being proposed. For highly digitised and consumer-facing businesses, we are proposing to look at the enterprise as a whole for taxation, as distinct from traditional arm’s length transfer-pricing principles, which are based on a separate-entity approach.

Another big change is that we would apply a formula-based approach to tax profits, as distinct from an arm’s length principle using facts and circumstances. That would simplify the process of tax calculation, which is very complicated now. These two are very important differences (from the current regime). 

Many countries have to give up some part of their tax jurisdiction rights (to agree to the proposals). Do you see that as a challenge?

Yes, it is a challenge to get 134 countries and jurisdictions to agree. It is also a challenge to make countries give up some of their fair tax rights. But we find countries are willing to do this if they get in exchange greater tax certainty, better dispute prevention, and binding dispute resolution mechanisms. The tax certainty component is a very important part of the package.

The fact is if we do not reach an agreement, we would have a proliferation of unilateral measures, which will stifle investment and growth and lead to increased compliance costs for companies. Businesses may then spend more on compliance than innovation.

What has been the feedback of companies to these proposals?

During the BEPS (Base Erosion and Profit Shifting) project, we had a lot of companies opposing that project. Paradoxically, we find a lot of support from companies, including big digital companies and non-digital ones. And the reason is that they want tax certainty, and not dealing with different measures across the world. They want stability in the international tax system increased. In our public consultations, we received tax proposals from big businesses — this is a first. They all want certainty (in tax interpretations) with standardised rules, and spend less time on compliance.

So, these proposals will apply to even brick-and-mortar, non-digital companies?

The proposal we have put forward in the “Unified Approach” applies not only to digital companies but also large consumer-facing businesses. We recognise that while the big focus is on digital companies, there are some unresolved issues with large non-digital companies. After discussion with a lot of countries we looked at what it is about digital companies that is enabling them to engage heavily in an economy without having a physical presence. A lot of that has to do with engagement with the consumer. So, our proposals would capture some traditional businesses — mostly business-to-consumer but also some business-to-business activity.

The new tax regime is not only about consumption, but also of sustained and significant economic activity.

The current tax regime is marred by litigation. Could you give us a sense of how you plan to address that issue?

Circumscribing the application of the rules to large multinationals limits the number of taxpayers caught in the new rules. (The proposal is to apply the new rules to companies that are over and above the euro 750 million turnover threshold. This threshold is under negotiation among countries). More importantly, we are trying to incorporate as part of the package binding dispute-resolution mechanisms to ensure that there is no lengthy, costly litigation.

How hopeful are you of a consensus on all issues, and by when?

First, we are trying to get a high-level political commitment to the way forward. We hope by January next year we get the political agreement on the outline of the architecture even if we have not sorted out the technical details. By June we hope to have a political commitment to the whole package. Our deadline is November 2020 — at the time of the G20 meet — where we present the final solution. The questions around implementation will come after that. All the core components and the key elements (of the new tax regime), including the carve-outs, the binding dispute resolution mechanism, should be ready by June next year.

So you expect all the countries to sign a joint agreement (once they arrive at a consensus)?

We feel there should be a separate agreement that will enable all countries to jump into the pool at the same time. But this is still under discussion.

Would countries have some sort of space to manoeuvre?

I would not say there will be a lot of space. But there will be flexibility built into the nexus threshold. Given the differences in population among countries, we may have different thresholds, depending on the size of a country.

India introduced the Equalisation Levy in 2016. What will happen to those unilateral measures?

There are around 20 countries that have introduced unilateral measures. When the new tax regime comes into play, we expect these unilateral measures to get repealed. The EQ in India does not generate too much revenue, but was intended to show that India wants to tax the digital economy.