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Just days ago, tax professionals were wondering whether the G20 would meet its 2020 deadline to reach an agreement on multinational taxation. We now have our answer: Treasury Secretary Steven Mnuchin has called for the suspension of the Organization of Economic Co-operation and Development (OECD) talks.
The official statement released by Monica Crowley, Treasury’s assistant secretary for public affairs, stated: “The United States has suggested a pause in the OECD talks on international taxation while governments around the world focus on responding to the Covid-19 pandemic and safely reopening their economies.”
The talks had aimed for a solution by the end of 2020.
In December of 2019, Mnuchin sent a letter to OECD Secretary-General José Ángel Gurría raising both concern and hope that issues faced by the international community might be nearing a resolution. The letter commented on separate aspects of the OECD’s two-pillar approach, with Mnuchin expressing concerns about Pillar 1, but supporting the general concepts of Pillar 2.
Pillar 1 focuses on the allocation of taxation rights, with a focus on nexus. Nexus is a legal term for a connection and is generally the basis for imposing tax. The tricky bit of nexus is nailing down that connection in an increasingly digital world (in the US, we know this from Wayfair). Some countries want to be able to tax profits of digital companies like Facebook and Apple inside of their jurisdiction; that’s at odds with the United States’ position on these matters. Some of those countries, like France and the United Kingdom, have signaled that they will be moving ahead with plans to tax digital services. The current administration has been clear that it could retaliate with tariffs against countries that adopt unilateral digital taxes, arguing those taxes tend to disproportionately burden US companies.
Pillar 2 focuses on other base erosion and profit shifting (BEPS) issues, including solutions to stop the race to lower corporate tax rates. When companies can hop from country to country as tax rates lower – when there’s no leveling mechanism – the result can be a confusing tangle of tax-home shopping. The US has indicated that it believes that an agreement could be reached on Pillar 2.
(You can read the OECD report on these issues from 2019 – which downloads as a PDF - here.)
The G20 began in September of 1999 as a meeting of Finance Ministers and Central Bank Governors. In 2008, during the global financial crisis, the G20 included the leaders of member countries with the first G20 Leaders’ Summit taking place in Washington DC in November 2008.
Today, membership of the G20 consists of 19 individual countries and the European Union. The 19 countries are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Republic of Korea, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom, and the United States. According to the organization, G20 members represent around 80% of the world’s economic output, two-thirds of the global population, and three-quarters of international trade.
Other countries are sometimes invited to participate, including Spain (a permanent guest invitee) and, for 2020, Jordan, Singapore, and Switzerland.
The OECD is an international group focused on establishing international standards and finding solutions to a range of social, economic, and environmental challenges. There are 37 member countries (you can find a list here), but other countries are often involved in efforts to resolve global issues. The OECD is helping to guide the conversation with the G20 to resolve these key tax issues.
Since the U.S. is a crucial player in the international tax community, the Treasury’s stepping out of the talks for a bit is a big deal.
Still, earlier today, Gurría sounded hopeful, issuing a statement that said, “Addressing the tax challenges arising from the digitalisation of the economy is long overdue.”
There is a basis for his optimism since Mnuchin indicated he wanted to resume talks later this year.
Gurría continued, “All members of the Inclusive Framework should remain engaged in the negotiation towards the goal of reaching a global solution by year end, drawing on all the technical work that has been done during the last three years, including throughout the COVID-19 crisis. Absent a multilateral solution, more countries will take unilateral measures and those that have them already may no longer continue to hold them back. This, in turn, would trigger tax disputes and, inevitably, heightened trade tensions. A trade war, especially at this point in time, where the world economy is going through a historical downturn, would hurt the economy, jobs and confidence even further. A multilateral solution based on the work of the 137 members of the Inclusive Framework at the OECD is clearly the best way forward.”