The ongoing discussion on addressing the tax challenges derived from the digitalization of the economy may derive in a reform of the international tax system. Leading this process represents undoubtedly a big challenge. As Bird said “[r]eforming international taxation -how national tax systems interact with each other- is an issue that is always technically complex, often economically significant, and sometimes politically explosive”; and in the current debate, social claims and political pressures have been huge.
While there seems to be consensus around the fact that something has to be done, no agreement regarding what “this something” is, has been reached. In this sense, the OECD Secretariat has recently gone forward by proposing the so-called “Unified Approach” (hereinafter, the proposal) under the work of Pillar One on revisiting nexus and profit allocation rules. As it is read in the public consultation document published on 9 October 2019, the proposal has been developed with a “goal in mind”, “to design a solution that attracts support from all members of the Inclusive Framework” (at par. 14). This may explain why it intends to take the commonalities of three previous alternatives -i.e. “user participation”, “marketing intangibles” and “significant economic presence”- none of which seemed to be a viable option to reach global consensus in the previous negotiation phase. Therefore, I would first like to recognize the efforts of the OECD Secretariat for the step forward that the proposal represents. However, I hereby would also like to share some of my thoughts –and worries- on this matter.
During the Public Consultation held on 21 and 22 November 2019, a recurring claim from different participating stakeholders consisted of more clarity on the scope of the proposal, in particular, on “Amount A” which “creates a new taxing right”. To clearly determine such scope, I believe that it is of utmost importance first to define the problem that is supposed to be addressed with the proposal. In this sense, stepping out a second of the specific discussion, I would like to urge to remember that in the genesis of these works we find the need to address income taxation of “highly digitalized” businesses which operate in certain markets with a minimum presence or no-presence at all and obtains untaxed high profits. Indeed, under the PE criteria their profits are not being captured at source, remaining untaxed, since the corporate tax-residence can be easily manipulated and taxation avoided. This shows us that not only outdated definitions of relevant conceptual categories such as “residence” and “source” need to be revisited, but agreement on what these categories refer to may be vital. Why? While different conceptions and definitions based on those conceptions may cause multiple taxation the Secretariat proposal is bringing in stage another category, “market jurisdiction”, which may result in more multiple taxation, confusion and complexity.
In effect, the proposal creates a new taxing right, which consists of assigning taxing rights on “excess” profits of MNE groups to market jurisdictions (the above-mentioned “Amount A”). In addition to the abovementioned lack of clarity on the scope, the quantification of the amount of profits to be allocated is also unclear. To circumvent this issue, it is of utmost relevance to previously respond to a basic question, why are we allocating taxing rights to market jurisdictions? i.e. what are the tax policy rationale and arguments behind this “new taxing right”?
Some are of the view that source and residence principles will be working alongside a destination principle. Does this mean that the mere existence of a market is a sine qua non for the generation of profits? If yes, what about indirect taxes, which are also part of the international tax system? Or do we still stick to a supply-based approach, meaning there may be some production factors in market countries that legitimize the grant of the new taxing right? E.g. what about the users as value creation drivers?
On the other hand, under Pillar Two, the so-called Global Anti-Base Erosion (GloBE), the OECD Secretariat has advanced a proposal concerning with the remaining issues on base erosion and profit shifting and the introduction of global minimum corporate income tax. I believe caution is required not to fall in the temptation to universalize the measure, forgetting precisely its anti-base erosion approach. In this regard, granting tax exemptions to genuine economic activities may be a legitimate instrument for States to promote economic growth. Is this that bad from a tax policy point of view? In the end, taxes are one of many aspects a foreign investor takes into account when deciding where to invest and one of many other costs a business afford. Digital and physical infrastructure, the legal system, the quantity and quality of work force, natural resource, geographical location, etc. and the equilibrium between these public benefits and the tax burden, are also under consideration. Additionally, investment generates other indirect tax effects (e.g. on consumption). Therefore, some questions need to be answered in black and white before we start the design work: is the objective to tax every item of income once (single tax principle)? at certain level of taxation (minimum income tax)? and no matter whether it is taxed at residence, at source or at “destination”?
Having said this, I wonder whether we are attending a “principle-shopping” era in which it is legitimate to pick the principle that better fits for purpose on a case by case basis, no matter the coherence of the whole tax system.
The result of the current discussion centered on Pillar One and Pillar Two, may have significant impact and delineate the path of the future of the international tax system; it deserves our greater attention. A principle-based solution which may lay the foundations for latter implementation of practical aspects is vital in order to achieve the required sense of fairness (inter-nation equity) of the solution and a long-lasting international compromise. That is why, before adopting further steps on design matters, I suggest clarifying what the underlying principles are and, once these have been identified, seeking for greater articulation and coherence -closing the gaps- within the existing international tax system.
*The appraisals expressed in this comment belong to the author and do not compromise any of the institutions to which she is related.
 Bird, R., “Reforming International Taxation: IS the Process the Real Product?” Hacienda Pública Española, Review of Public Economics, 216-(2/2016), 159-180