Professor Scott Wilkie Comments on the Latest OECD "Pillars" Developments

It is well known that the Organisation for Economic Co-operation and Development (OECD) and the Inclusive Framework of approximately 140 countries that the OECD has organized, have been engaged in developing recommendations to rejig the "rules" and conventions by which countries assume and allocate among each other, taxing rights.

 

The catalyst, of course, and the commercial headliner in the present discussion is the influence of "digital" modalities of business and trade in "digital products" on the reliability with which countries may assert and sustain the taxation of income generated by economic activities that they host. Pointedly, the not so latent concern is that businesses that are able to exploit markets without having in them the kind of presence that most think is necessary for taxation to bite, avoid material degrees of taxation despite the obvious economic and commercial connections to markets without which there would be no income to tax.

 

The OECD, via the Pillars, has proposed ways for the largest of multinational enterprises to "share" their taxable income with market countries through a fractional allocation of residual as well as routine sales and marketing - related income with them (Pillar 1) and to have implemented a global minimum tax of 15% which amounts to an objectively formulated global general anti-avoidance "rule" (Pillar 2). The United States has vigorously embraced Pillar 2, though not Pillar 1, but in any event seeks "care outs" to the extent that U.S. achieves much the same effects as the global approach the U.S. advocates for other countries. In this way the U.S.'s influence over international tax policy continues in much the same way it has since the dawn of "modern" international taxation via notions shaped by the League of Nations (promoted but not joined by the U.S.); the global adoption of what amounts to U.S transfer pricing rules and guidance, and the themes and architecture of "controlled foreign corporation" rules (in Canadian tax language, "foreign affiliate" rules) are other examples.

 

As does much of the international tax conversation in recent memory, the seeming urgency of the Pillars and most recently their embrace by the G20 Finance Ministers and Leaders on October 8 and October 30, 2021, respectively, distracts from significant public and trade law considerations and the sheer complexity associated with superimposing in short order a parallel corporate tax system on the those that already exist, for a select group of "in scope" taxpayers whose income, it is thought, is not otherwise reachable by countries considered entitled to tax (some of) it.

 

Tax Notes International has recently published my article drawing attention to the difficult path needing to be trod to get from a political "deal" to enforceable law in an internationally identical way as far as countries' tax systems and law are concerned. The article can be accessed at:  https://www.taxnotes.com/tax-notes-federal/digital-economy/next-steps-oecd-pillars-moving-political-deal-enforceable-law/2021/11/22/7cm50?highlight=Scott%20Wilkie. In it, I also consider Canada's guarded reaction despite its enthusiasm, for the record, for the global project. As well, I allude to implications that the "deal", no matter how well intentioned, for countries' fiscal independence, recognizing that taxation is in a matter of speaking a devise or an enabler of fiscal policy which is itself both the framework for and the manner for giving life to economic and social policy that define or at least significantly influence  any country's national essence, sense of national self and personality - in effect, how we live together and support each other through kinds and degrees of collective consumption and mutual assurance, and consequently have notable cultural and political implications.  Professor Ed Kleinbard talked about the predominant role of fiscal rather than tax policy with considerations of this sort in mind in We Are Better Than This - How Government Should Spend Our Money (Oxford University Press, 2015). Professor Dani Rodrik is a leading commentator on what he sees are unavoidable tensions between democracy, national sovereignty, and multilateralism (notably, multilateral economic relations), which he styles as a "trilemma" and sets out in a highly accessible way in The Globalization Paradox - Democracy and the Future of the World Economy (W.W. Norton & Company, 2011). In his matrix, the pursuit of uniformity / universality in the service of the last - multilateralism - has inevitable and not necessarily positive effects on any affected country's democratic institutions and ability to pursue regulatory and other objectives (taxation, for example, as an extension of fiscal policy) as a sovereign nation, because of the subordination of independence in policy making to an overarching universal global standard codified as "law" of some sort.

 

My article is intended to penetrate beneath the veneer of the present Pillars discussions, in a manner of speaking to get off the bandwagon, with more fundamental legal issues in mind.

 

Scott Wilkie

Distinguished Professor of Practice, Osgoode Hall Law School