April 12, 2019

The OECD champions a global tax reform

Sometimes, you have to lose a few battles to win the war. Or, in the case of the European Commission’s decades-long  corporate tax reform, it has had to lose a lot of legislative fights. Indeed, the EU executive body has been waging a seemingly futile losing battle dating back to the 1992 launch of the EU single market. The common consolidated corporate tax base (CCCTB) was officially proposed in 2011 but that was after years of backroom consultation. When that proposal did not go anywhere, it was repackaged in 2016 with a few new tweaks, including a two-stage legislative process (first a common tax base and then the fully-fledged CCCTB) and a focus, among others, on boosting growth by putting equity and debt  financing on equal grounds. That plan has also been spinning wheels in the Council of Ministers for nearly three years. 

The continued break on the CCCTB comes despite what the European Commission sensed were big political opportunities for corporate tax reform. The first of those was  the 2016 Brexit referendum. The U.K. has been for decades the chief antagonist to not only EU corporate tax reform but on almost all other EU tax policy – the cross-border savings tax being the exception.  The second breakthrough was the U.S. corporate tax overhaul in 2017, including lowering rates from above 30 percent to 21 percent. European Commission officials who have spent years toiling under the CCCTB bonnet in expert working groups and other talking shop forums only to be continually dismissed as ivory tower dreamers were optimistic. Finally, they thought, the EU would have to follow suit. 

However that enthusiasm waned as member states led by Ireland as well as those in the Baltic countries and in Eastern and Central Europe continue to dig in against the CCCTB.

Nonetheless the Commission corporate tax reform wonks did find respite when the media spotlight suddenly focused on the tax bills of  U.S. tech companies. News stories insisting that the Silicon Valley behemoths were not only paying minimal amounts of taxes but were also stashing billions in profits in tax havens such as Grand Cayman or Bermuda spawned a new EU corporate tax reform battle front: digital taxation. Quickly the technocrats got out their user value creation slide rulers, apportionment formulas and financial threshold calculators and drew up a new tax proposal.

 But, again, another battle lost. This time there it was not the U.K. as corporate tax reform antagonist-in-chief. The Nordic nations along with IrelandCyprusMalta and others refused to accept even a stripped down version of the plan originally known as the Digital Service Tax. The mantra of the DST opponents was that digital corporate tax solutions must be worked at the at the OECD.

But it turns out all those hours toiling in the technical trenches by Commission tax experts has not been in vain. That’s because the OECD has drawn up a two-pillar approach to digital tax reform that borrows heavily on the CCCTB and DST manual. As one European Commission official put it: all the work in the past years has not been wasted.

If EU member states were in denial about how the CCCTB and DST core elements have resurfaced  then OECD Secretary General Angel Gurria set them straight  April 6 when he met with them in the Romanian capital of Bucharest. The message: good progress in the OECD digital tax negotiations due to be concluded by the end of 2020 has been made on profit reallocation and a minimum corporate tax components.

Suddenly countries that have opposed the CCCTB and the DST by insisting global solutions are needed in the OECD have nowhere to hide. It is for that reason the European Commission will be proposing in the coming weeks new – actually old – corporate tax reform plans. The idea is that EU member states should rally around them in the OECD discussions. The Commission ideas will be debated in May at the next Council of Economic and Finance Minister meeting.

By speaking with one voice within the international taxation debate the EU would greatly increase our joint ability to influence the debate,” the European Commission stated in a paper it drew up for the April 6 meeting in Bucharest.

That was the politically polite message from the European Commission. The experts under bonnet would be justified in muttering to themselves something to the effect that “you can run but you can not hide.” Indeed a day of reckoning is coming for the EU member states that have fought a war against corporate tax reform, especially one that involves profit reallocation.