This blog was first published published in Swedish on September 15, 2021. The text is published "as is" with no amendments made because of subsequent events
Those who read my articles in Tax Notes International (1) know I am critical of the G20/OECD's pillar 1 proposal. The proposed rules legalize tax principles that:
the OECD has, for good reasons, combated for decades (and which disadvantages Sweden);
benefits countries with large consumer markets (which also disadvantages Sweden); and
are almost ridiculously complicated to apply.
Now I'll make a prediction about the future. Pillar 1 - regardless of its final content - will never be implemented and enter into force on a global basis.
Below I explain why.
1. Background
Today, the United States' digital giants ("GAFAM companies"), but also other Internet-based industries, conduct extensive economic activities in countries and yet paying only nominal corporate tax.
Ultimately, it's about trying to agree globally on rules to be able to tax not only companies' physical presence, but also their economic presence in the country of activity.
As an example, Google Sweden had in 2020 an actual turnover in Sweden of approximately SEK 8-9 billion (reported turnover was 1.3 billion), but paid only 25 million in tax (source: Svenska Dagbladet).
Current international corporate tax rules from the 1920s are based on physical presence. However, GAFAM companies can easily avoid these rules by (in one form or another) operating over the internet.
The international rules in the area of corporate tax therefore need to be modernized. by the Swedish Parliament by the Swedish Parliament. Ultimately, it's about trying to agree globally on rules to be able to tax not only companies' physical presence, but also their economic presence in the country of activity.
2. No progress between 2015-2020
The OECD's BEPS project was completed in the autumn of 2015 without being able to agree on how digital activities should be taxed. The United States subsequently blocked OECD work on the issue for several years. The United States simply had no interest in cooperating on an issue that was mainly about how American companies should be taxed outside the United States.
Frustrated by the lack of progress, the European Commission presented its own proposal for an EU-wide digital tax in the spring of 2018. Similarly, countries around the world began to introduce similar taxes.
The United States considers digital taxes to be discriminatory because they are mainly aimed at US GAFAM companies and have threatened with trade sanctions if. any such taxes are introduced outside the OECD framework.
To avoid trade wars and to prevent the issue from slipping out of the hands of both the OECD and the United States, the Trump administration reluctantly accepted that the OECD's secretariat drafted a compromise proposal on its own. The Secretariat tried desperately to formulate a draft that satisfied all parties.
The end result - which was presented in October 2020 and goes by the name of "Pillar 1" - became a technically complex and practically inapplicable product.
The Trump administration rejected the proposal and later announced that the issue should rest until after the US election.
3. The Biden administration is actively working to find a solution
The Biden administration has now announced that it may consider accepting a revised version of Pillar 1 in exchange for the rest of the world abolishing their digital taxes and agreeing to the introduction of a global minimum tax of 15% on in-scope companies (referred to as "pillar 2").
Instead of targeting certain types of activities (digital and consumer-facing businesses), the new version of Pillar 1 targets the 85-90 largest corporate groups in the world. Furthermore, the subjective criteria in the original proposal have been replaced by objective quantitative criteria (see pressrelease here).
4. Global agreement likely soon
The United States is the initiator of the new version of Pillar 1 and is pushing for a global agreement within the OECD framework. This suggests that the G20/OECD/Inclusive Framework will agree on a final version of Pillar 1 in October.
The G20 and the OECD will celebrate the "historic" adoption of Pillar 1 and newspapers around the world will write about the agreement and allow experts to comment on both its content and excellence.
Republicans dislike OECD work in general and all forms of multilateral cooperation in particular.
Despite this, Pillar 1 is already doomed, in other words DoD ("dead on arrival"). (2)
5. Why Pillar 1 is "dead on arrival"
Pillar 1 can only be implemented through the adoption of a multilateral convention developed under the umbrella of the OECD. Both the calculation of in-scope MNE tax bases and the elimination of double taxation require coordination between a large number of countries' tax authorities. How a country calculates the pillar 1 tax base for an in-scope MNE will affect at least 30-40 other countries (!).
The US Senate ratifies bilateral and multilateral tax treaties and conventions by a two-third majority. Republican participation is therefore required, regardless of the exact political composition of the Senate at any given time.
Pillar 1 is doomed because the Republicans will block all attempts by the Senate to implement the rules. And if the US does not implement Pillar 1, the global agreement will fall because the rules are primarily aimed at redistributing the profits of American GAFAM companies to third countries.
I have worked for a Republican administration for 5 years at the OECD and have a pretty good understanding of how they think and operate. Republicans dislike OECD work in general and all forms of multilateral cooperation in particular.
The Republicans in the Senate have stopped ratifying all new bilateral tax treaties since 2011. Furthermore, Republicans are currently outraged that Democrats are dismantling the Trump administration's tax reform.
Against this background, the probability is at best microscopic that Republicans will be helpful in implementing a:
an international convention negotiated by a Democratic government that
makes future Congress action dependent on the OECD (!) and
deprives the United States of government revenue and
increases the tax burden of US MNEs and
curbs Congress' tax sovereignty over its own global corporations (!!).
It will never happen. Believe me, the sun will exhaust its fuel and go out of existence before the Republicans support the adoption of such a convention in the Senate. Pillar 1 is doomed to end up at history's rubbish dump.
The Swedish government should already now plan for this eventuality and in particular its consequences for both Pillar 1 and Pillar 2.
(1) Torsten Fensby, Why Sweden Should Lobby for a Temporary OECD-Approved Digital Services Tax, Tax Notes International, July 13, 2020; Torsten Fensby, What the G-20 Should Consider Before Adopting Pillars 1 and 2, Tax Notes International, September 21, 2020.
(2) The term is jokingly used in the US Congress in relation to legislative proposals that lack all political support to be adopted.
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