On October 12, 2020, the Organization for Economic Co-operation and Development (OECD) transmitted a webcast to inform the latest developments regarding the work that the OECD/G-20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) has been doing to address the challenges arising from the digitalization of the economy (the so-called “BEPS 2.0”). The project builds through two main pillars: Pillar One aims to create a new nexus for profit allocation regarding the digital economy, while Pillar Two concentrates in developing global rules for the implementation of a minimum tax for multinational corporations.
It is clear now that the Inclusive Framework will not achieve a consensus-based solution by the end of 2020, as was expected. While addressing to the press, the OECD's Secretary-General, Mr. José Ángel Gurría, made clear that the impossibility of reaching a consensus within the proposed time-frame was due not only to the challenges inflicted by the COVID-19 pandemic but principally for “political issues”, making an apparent reference to the unwillingness of the United States (US) in agreeing with the Inclusive Framework’s propositions. Mr. Gurría warned that if an agreement is not reached by mid-2021, “the alternative will be a trade war” resulting from the “multiplication of unilateral actions where literally dozens of countries would follow the political imperative of having to tax a growing digitalization of the world’s economy” and the potential retaliatory measures “by countries that feel that their own companies are being targeted.” However, the postponement of a consensus-based solution may have come in good time given the proximity of the US elections scheduled for the end of this month. Depending on the results, the Inclusive Framework may expect an easier path in reaching a consensus agreement.
Mr. Gurría’s warning also comes in a time when the United Nations recently released a draft of the proposed new Article 12B for the UN Model Tax Convention. Referred article stipulates that the source state can impose withholding tax on income from automated digital services. The UN proposition can be applied in the absence of any global consensus, which seems to be exactly the current scenario, and its impacts were already discussed in this Blog by myself here, and by Professor Scott Wilkie here.
Howsoever, a peaceful designation of new taxing rights and the stipulation of a global minimum tax seem to be far from becoming a reality, and it would not be a surprise if source countries tired of waiting for consensus start taking unilateral actions to safeguard their taxing rights.