Last week the Organisation for Economic Co-operation and Development (OECD) hosted a public consultation on several proposals to rearrange international tax rules. The policies up for discussion include three separate approaches to reallocate taxing rights among countries and two proposals to institute a minimum level of taxation for multinational corporations. In the context of the Base Erosion and Profit Shifting (BEPS) Project Action 1, the OECD has categorized the separate proposals as Pillar 1 (rearranging of taxing rights) and Pillar 2 (minimum tax approach) policies. The Pillar 1 proposals include a rearranging of taxing rights based on: Profits derived from user contributions in a market country Profits attributable to marketing intangibles investments Allocation of taxing rights using a formula including sales, assets, employees, and potentially users The Pillar 2 proposals include stronger base erosion protections including: A global minimum tax approach like the U.S. Global Intangible Low Tax Income (GILTI) A tax on base eroding payments like the U.S. Base Erosion Anti-Abuse Tax (BEAT) The public consultation provided a forum for stakeholders to provide their views on these proposals. Respondents included tax professionals, business leaders, and civil society organizations. The Tax Foundation participated in the consultation and had previously submitted a written response to the OECD consultation. Several key themes arose during the discussion including concerns over the potential complexity of implementing the proposals, a desire for evaluation of recent changes to international tax rules prior to adoption of new approaches, a warning to avoid creating double taxation scenarios, and a willingness to work toward a pragmatic solution. Complexity Concerns The potential complexity could arise from several standpoints. The reallocation of taxing rights would create new tax liabilities for businesses in jurisdictions where they currently do not pay tax for one reason or another. When those liabilities arise, businesses may face challenges in filing tax returns or understanding why a withholding tax applies in a particular jurisdiction. Respondents noted that complexity could also come from new rules being layered on top of current international tax rules without reconciling differences between the two. Conflicts over the application of current transfer pricing rules (which guide the taxation of cross-border transactions within companies) could be exacerbated if the uncertainties of transfer pricing valuations are relied upon in calculating which country taxes what share of a business’s profits. Current international tax rules and their intersection with double tax treaties are by no means simple. Any proposal to change international tax rights should take this complexity into account. Stay Updated on Tax Issues Around the World Select Country United States Aaland Islands Afghanistan Albania Algeria American Samoa Andorra Angola Anguilla Antarctica Antigua And Barbuda Argentina Armenia Aruba Australia Austria Azerbaijan Bahamas Bahrain Bangladesh Barbados Belarus Belgium Belize Benin Bermuda Bhutan Bolivia Bonaire, Saint Eustatius and Saba Bosnia and Herzegovina Botswana Bouvet Island Brazil British Indian Ocean Territory Brunei Darussalam Bulgaria Burkina Faso Burundi Cambodia Cameroon Canada Cape Verde Cayman Islands Central African Republic Chad Chile China Christmas Island Cocos (Keeling) Islands Colombia Comoros Congo Cook Islands Costa Rica Cote D'Ivoire Croatia Cuba Curacao Cyprus Czech Republic Democratic Republic of the Congo Denmark Djibouti Dominica Dominican Republic Ecuador Egypt El Salvador Equatorial Guinea Eritrea Estonia Ethiopia Falkland Islands Faroe Islands Fiji Finland France French Guiana French Polynesia French Southern Territories Gabon Gambia Georgia Germany Ghana Gibraltar Greece Greenland Grenada Guadeloupe Guam Guatemala Guernsey Guinea Guinea-Bissau Guyana Haiti Heard and Mc Donald Islands Honduras Hong Kong Hungary Iceland India Indonesia Iran Iraq Ireland Isle of Man Israel Italy Jamaica Japan Jersey (Channel Islands) Jordan Kazakhstan Kenya Kiribati Kuwait Kyrgyzstan Lao People's Democratic Republic Latvia Lebanon Lesotho Liberia Libya Liechtenstein Lithuania Luxembourg Macau Macedonia Madagascar Malawi Malaysia Maldives Mali Malta Marshall Islands Martinique Mauritania Mauritius Mayotte Mexico Federated States of Micronesia Republic of Moldova Monaco Mongolia Montenegro Montserrat Morocco Mozambique Myanmar Namibia Nauru Nepal Netherlands Netherlands Antilles New Caledonia New Zealand Nicaragua Niger Nigeria Niue Norfolk Island North Korea Northern Mariana Islands Norway Oman Pakistan Palau Palestine Panama Papua New Guinea Paraguay Peru Philippines Pitcairn Poland Portugal Puerto Rico Qatar Republic of Kosovo Reunion Romania Russia Rwanda Saint Kitts and Nevis Saint Lucia Saint Martin Saint Vincent and the Grenadines Samoa (Independent) San Marino Sao Tome and Principe Saudi Arabia Senegal Serbia Seychelles Sierra Leone Singapore Sint Maarten Slovak Republic Slovenia Solomon Islands Somalia South Africa South Georgia and the South Sandwich Islands South Korea South Sudan Spain Sri Lanka St. Helena St. Pierre and Miquelon Sudan Suriname Svalbard and Jan Mayen Islands Swaziland Sweden Switzerland Syria Taiwan Tajikistan Tanzania Thailand Timor-Leste Togo Tokelau Tonga Trinidad and Tobago Tunisia Turkey Turkmenistan Turks & Caicos Islands Turks and Caicos Islands Tuvalu Uganda Ukraine United Arab Emirates United Kingdom Uruguay USA Minor Outlying Islands Uzbekistan Vanuatu Vatican City State (Holy See) Venezuela Vietnam Virgin Islands (British) Virgin Islands (U.S.) Wallis and Futuna Islands Western Sahara Yemen Zambia Zimbabwe Email + Advertising By subscribing, you agree to be contacted by the Tax Foundation. We respect the privacy of all our subscribers and you can learn more about our privacy policy here. One respondent specifically identified ways that current rules create challenges for customs authorities and that shifting to a new set of rules could create challenges not only in tax administration, but also for customs and trade authorities. There was also discussion of how the OECD might create safe harbors either for countries or for businesses to allow them alternatives for simpler compliance or administration of the new rules. Those simplifications could, potentially, provide businesses with more tax certainty than they currently have. Several respondents also pointed out that the U.S. GILTI and BEAT policies have created significant compliance and tax burdens and may not be the best models for the OECD to follow. Concerns were raised that these policies may not fit well with current tax rules and could create very complex tax outcomes for some industries. Evaluation Before Implementation Several respondents noted that countries have only recently been implementing proposals resulting from the BEPS project. These include tougher transfer pricing regulations, patent box nexus rules, controlled foreign corporation rules, and country-by-country reporting. Respondents at the consultation noted that the effectiveness of these recently adopted policies should be evaluated prior to the OECD work on new policies to minimize base erosion. This is an important issue for the OECD to consider. The current push for rearranging international tax rules has loosely defined objectives, and it is possible that the current policies on the books meet those objectives. However, it is still too early to measure the effectiveness of these policies on profit shifting. Respondents including the Tax Foundation noted the importance of not only understanding the state of policy as it stands right now, but also the importance for the OECD to be measuring how various Pillar 1 and Pillar 2 policies could impact revenues and business activity. Don’t Tax Us Twice Another key theme from the consultation was the potential for double taxation of the same income under various scenarios. Multiple respondents focused on how Pillar 2 options could create likely scenarios for several layers of tax on the same income. One respondent walked the audience through a scenario where a company with offices in four countries could face five different layers of tax due to the interaction of various BEPS and Pillar 2 policies. Multiple layers of tax on the same income create both administrative and economic burdens as the tax paid may not align with profits generated in one jurisdiction over another. The OECD was encouraged to study the potential for double taxation and to allow for dispute prevention between taxing jurisdictions so that companies could avoid having income taxed by more than one tax authority at a time. Pragmatic Approaches Some respondents provided comments admitting that they were willing to be pragmatic in working toward a solution. However, as one respondent noted, a pragmatic solution without principle might result in an unstable agreement. The OECD should therefore focus on adopting new proposals that align with shared principles and an agreed-upon rationale. The pragmatism was also evidenced in the suggestion of a formulaic approach to rearranging taxing rights. A formula approach based on some measurable metric like sales in a jurisdiction could simplify both tax compliance and tax administration. Unfortunately, at this stage there is not enough detail in either the OECD approaches or the suggested formulas to determine the effects of any of the approaches. Conclusion The public consultation resulted in general agreement that something needs to change in the international tax rules, but also that there could be significant challenges to implementing that change. As Tax Foundation reminded the audience during the consultation, it is important to recognize that businesses are central to tax collection systems and the importance of having a discussion that is informed by the facts. The OECD will continue to review the comments that have been received and is expected to publish a work plan in early summer. The OECD has a goal of reaching an agreement on a new policy in 2020. Tax Foundation will continue to monitor the OECD’s work on these proposals and will follow up with further analysis. Daniel Bunn discusses the need to look at how each policy impacts the cost of capital and incentives to invest as well as overall tax complexity. Click the image above to watch. Scott Hodge emphasizes that corporate income taxes impact workers and consumers as well as businesses. Click the image above to watch. Stay Updated on Tax Issues Around the World Select Country United States Aaland Islands Afghanistan Albania Algeria American Samoa Andorra Angola Anguilla Antarctica Antigua And Barbuda Argentina Armenia Aruba Australia Austria Azerbaijan Bahamas Bahrain Bangladesh Barbados Belarus Belgium Belize Benin Bermuda Bhutan Bolivia Bonaire, Saint Eustatius and Saba Bosnia and Herzegovina Botswana Bouvet Island Brazil British Indian Ocean Territory Brunei Darussalam Bulgaria Burkina Faso Burundi Cambodia Cameroon Canada Cape Verde Cayman Islands Central African Republic Chad Chile China Christmas Island Cocos (Keeling) Islands Colombia Comoros Congo Cook Islands Costa Rica Cote D'Ivoire Croatia Cuba Curacao Cyprus Czech Republic Democratic Republic of the Congo Denmark Djibouti Dominica Dominican Republic Ecuador Egypt El Salvador Equatorial Guinea Eritrea Estonia Ethiopia Falkland Islands Faroe Islands Fiji Finland France French Guiana French Polynesia French Southern Territories Gabon Gambia Georgia Germany Ghana Gibraltar Greece Greenland Grenada Guadeloupe Guam Guatemala Guernsey Guinea Guinea-Bissau Guyana Haiti Heard and Mc Donald Islands Honduras Hong Kong Hungary Iceland India Indonesia Iran Iraq Ireland Isle of Man Israel Italy Jamaica Japan Jersey (Channel Islands) Jordan Kazakhstan Kenya Kiribati Kuwait Kyrgyzstan Lao People's Democratic Republic Latvia Lebanon Lesotho Liberia Libya Liechtenstein Lithuania Luxembourg Macau Macedonia Madagascar Malawi Malaysia Maldives Mali Malta Marshall Islands Martinique Mauritania Mauritius Mayotte Mexico Federated States of Micronesia Republic of Moldova Monaco Mongolia Montenegro Montserrat Morocco Mozambique Myanmar Namibia Nauru Nepal Netherlands Netherlands Antilles New Caledonia New Zealand Nicaragua Niger Nigeria Niue Norfolk Island North Korea Northern Mariana Islands Norway Oman Pakistan Palau Palestine Panama Papua New Guinea Paraguay Peru Philippines Pitcairn Poland Portugal Puerto Rico Qatar Republic of Kosovo Reunion Romania Russia Rwanda Saint Kitts and Nevis Saint Lucia Saint Martin Saint Vincent and the Grenadines Samoa (Independent) San Marino Sao Tome and Principe Saudi Arabia Senegal Serbia Seychelles Sierra Leone Singapore Sint Maarten Slovak Republic Slovenia Solomon Islands Somalia South Africa South Georgia and the South Sandwich Islands South Korea South Sudan Spain Sri Lanka St. Helena St. Pierre and Miquelon Sudan Suriname Svalbard and Jan Mayen Islands Swaziland Sweden Switzerland Syria Taiwan Tajikistan Tanzania Thailand Timor-Leste Togo Tokelau Tonga Trinidad and Tobago Tunisia Turkey Turkmenistan Turks & Caicos Islands Turks and Caicos Islands Tuvalu Uganda Ukraine United Arab Emirates United Kingdom Uruguay USA Minor Outlying Islands Uzbekistan Vanuatu Vatican City State (Holy See) Venezuela Vietnam Virgin Islands (British) Virgin Islands (U.S.) Wallis and Futuna Islands Western Sahara Yemen Zambia Zimbabwe Email + Advertising By subscribing, you agree to be contacted by the Tax Foundation. We respect the privacy of all our subscribers and you can learn more about our privacy policy here.