Guglielmo Fransoni


Comment to the “Statement by the OECD/G20 Inclusive Framework on BEPS on the Two -Pillar Approach to Address the Tax Challenges Arising from the Digitalisation of the Economy” approved by the OECD/G20 Inclusive Framework on BEPS on 29-30 January 2020

1. January 2020 OECD/G20 Statement

At the end of January 2020, following the intensive work carried on during the previous year, OECD and G20 issued the Statement by the OECD/G20 Inclusive Framework on BEPS on the Two-Pillar Approach (hereinafter, the “Statement”) which outlines the architecture of Pillar One and describes its objectives and the many issues the solution of which is still to be found and/or agreed upon.

The Statement is very interesting and provides an essential overview of a new taxation system which will probably arise on a date which might not be very close, but neither very far.

As well as the other documents that have been and will be issued at the various stages of the process which will lead to such system, the Statement is important because it gives some information about the shared objectives, the divergences and the compromises upon which the final solution will be based.

Of course, since the solution that will be devised will be more the outcome of negotiations than the product of ingenuity, most of this information is not delivered straightforwardly, but is expressed in a language covered under many layers of political and bureaucratic make-up where each word is weighed in such a way that none of the parties involved in the negotiation should be displeased.

Therefore, the understanding of such objectives, divergences ad compromises imply the effort of looking under those layers of make-up.

2. The ultimate scope of Pillar One

What we have just said is particularly true for the ultimate scope of Pillar One because this is not only deftly disguised in the technical language of the Statement, but is also commonly misrepresented in the public debate.

We are, therefore, called to understand what is the real meaning of sentences such as «In the digital age, allocation of taxing rights and taxable profits can no longer be exclusively circumscribed by reference to physical presence» (par. 15).

In the current international taxation system, in fact, the absence of “physical presence” (i.e. a permanent establishment) in one country does not entail that profits are not taxed. It only means that profits are (or should be) taxed in the country of residence (of the ultimate parent company).

Therefore, the above sentence should be translated as «In the digital age, the allocation of the primary taxing rights to the country of residence is not in line with the interest of the international community».

In more simple words, what is wrong in the current system of international taxation is that it grants to the country of residence too large a share in the profits of the MNEs involved in the digital business.

The current taxation system is flawed not because of the loopholes granted to MNEs, but because it allows only the country of residence (of the parent company) to tax their profits (or the largest part thereof) and does not allow the countries where MNEs’ consumers are located to partake to such taxation.

It is not by chance, therefore, that the U.S. – as the Statement duly reports – has granted its support to the implementation of Pillar One only on a “safe harbour” basis which basically means that it should become an optional regime (see U.S. Treasury Secretary letter dated December 3, 2019).

This means that the main aim of Pillar One is not changing some features of the current international taxation system, but departing (although, as we shall see, only partially) from its fundamental principle, which is that of residence.

3. Einaudi’s revenge?

It is common knowledge that the basis of the current international taxation system were laid down by a group of four economic experts – Bruins (The Netherlands), Einaudi (Italy), Seligman (U.S.A.) and Stamp (U.K.) – appointed by the League of Nations and further developed by the committee of technical experts which, starting from the 1923 Report of the economic expert, outlined the first model convention in 1925.

The Economic Expert Committee was deeply influenced by E.R. Seligman’s preference for the notion of income tax as a “personal tax” (i.e. a tax centred on the individual or on the company earning the profits of its activity). The only dissenting opinion was probably that of L. Einaudi (who “happened not to be present” to the final meeting of the committee): due to his pragmatic approach to taxation issues he always showed a preference for a notion of income tax as an objective tax (i.e. a tax centred upon the place where the profits are earned).

However, the prevalent view within the Economic Expert Committee converged with that of the Technical Expert Committee where T. Adams (as U.S. representative) managed to grant the affirmation of the foreign tax credit system, which was in place in the U.S. as the solution to the double taxation issues.

Therefore, from 1925 onward, the international tax system has always been based upon the principle of residence (which is a direct consequence of the notion of income tax as a personal tax) therefore attributing the main right to tax to the country of residence. This right is derogated only when there is a permanent establishment and only to the extent of the amount of income that can be allocated to it. But, as we said, all the income that cannot be attributed to a permanent establishment is, by default, attributed to the country of residence (which is also the country entitled to allow tax relief to taxpayers in order to prevent double taxation).

Pillar One is a decisive move in a totally different direction.

The profit derived from digital business activity is divided in three parts (called Amount A, Amount B and Amount C).

While Amount C and (albeit to a lesser extent) Amount B will still be treated according to the classic principles, Amount A shall be divided among different countries totally disregarding the principle of residence.

Although, apparently, this change pertains only to Amount A, which represents only a part of the total income, the departure from the notion of income tax as a personal tax is marked by the sheer fact that “income” is conceived as something divisible in itself and separate from (and taking precedence upon) the entity which earns the profits. This means that, beyond the appearances, such departure is, in effect, radical.

It is thoroughly consistent with the previous remark that, in the definition of Amount A provided by the Statement, such problems as the types of income falling within the scope of this system and as the rules for the computation of the tax base are extensively elaborated, while, on the other hand, only a few final lines (see par. 52) are dedicated to the identification of the taxpayer (which will be one or more companies in the MNEs’ group) or to the jurisdiction which will be responsible for the elimination of double taxation (see par. 51).

Although we may conceive this as being a late but effective vindication of Einaudi’s pragmatic approach, in reality it is simply a possible indicator of a shift in the balance of powers in the international community.

The position taken by the U.S. Treasury shows that this shift is far from being fully accomplished (if it will ever be). However, it is clear that the implementation of Pillar One will not be just the result of the deep feelings of international justice in taxation residing in the minds of the Heads of States. In fact, such an achievement will be fostered by unilateral measures that the “marketing countries” would otherwise implement (and are already implementing). And it is not a farfetched assumption that, because of those measures, also the MNEs themselves are exercising their influence and power toward the attainment of a different (and more agreeable) result.

The Statement itself provides some credit to these assumptions, if we are not wrong in reading, perhaps just in the filigree, something very similar to the tactic of the “stick and carrot” in the insistence on the fact that «any consensus based agreement must include a commitment by members of the Inclusive Framework to implement this agreement and at the same time to withdraw relevant unilateral actions» (see par. 89).

4. A new balance in international power?

As we said, the implementation of this new system marks a radical change in the fundamental principles of international taxation that, in turn, entails from a shift in the balance of power.

But this is not the end of the story. Experience and history show that taxing powers and their distribution have strong “performative” effects in both the domestic and international constitutions.

It is somehow surprising, therefore, that the work of OECD and G20 has attracted, for the time being, such a limited attention.

And the surprise grows when we realise that the Statement envisages, in the purest matter-of-factly approach conceivable, that Pillar One will be inevitably complemented by a totally unprecedented central organisation (the fact that it is not called in this way in the Statement does not change the reality).

In fact, the international means that should be put in place in order to implement Pillar One are very different from those required under the present system.

First of all, it is worth to have in mind that bi-lateral treaties were fully sufficient in order to implement the current principles of taxation. Indeed, they were even superabundant: when two countries had in their domestic laws the same definition of PE, the same notion of residence (plus a tie-breaking rule) and the same rule for preventing double taxation, they could have done without a treaty (at least in theory).

This will not be possible under the Pillar One regime.

First of all, it is unavoidable that the substantial rules (i.e. those concerning the definition of Amount A, its scope, the tax base, etc.) can become operative only through a multilateral treaty. The Statement, when dealing with the implementation issues, does not expressly say that a multilateral treaty is unavoidable, but the necessity of a multilateral treaty is clearly implied in the whole document and explicitly recognised when it comes to deal with the methods to relieve double taxation which makes «necessary to determine which jurisdiction will have an obligation to eliminate any resulting double taxation and, if there is more than one jurisdiction, the quantum of the relief to be provided by each» (see par. 51).

There is, however, something of greater importance.

The Statement is justly concerned about the issue of certainty and simplicity in the implementation of the system for both taxpayers and tax administration. The OECD and G20 proposal, in this respect, is that of establishing a process of early dispute prevention «through the establishment of representative panels» and this will «require work on the process and governance of such panels» (see par. 70).

Furthermore, such panels (or similar bodies) will be needed for dealing with the disputes that, notwithstanding the early dispute mechanism, will inevitably arise (see par. 75) ex post in the assessment of the tax base since, as the Statement acknowledges (see par. 68), «it would be impractical (if not impossible) to allow all affected tax administration to assess and audit an MNE’s calculation and allocation of Amount A», and, why not, for the collection of the additional tax assessed.

These “panels”, notwithstanding the deceiving “neutrality” of their denomination, appear, at least at this stage, as an embryonal version of centralised administrative (and/or judicial) bodies shared among the countries which will be part of the multilateral treaty.

If this is true, then it will mean that the conclusion of such treaty will imply a far deeper and radical transfer (or dismissal) of the State tax sovereignty than the (quite moderate) one which has taken place, for the time being, as a result of the conclusion of the bi-lateral treaties we have been so far accustomed to.

Although quite revolutionary in itself, this may however not be the most radical change.

If we take a look at the very general outline of the early dispute resolution mechanism described in the Statement, we cannot refrain from thinking that it would hardly function without the active participation not only of the various countries involved, but also of the MNE concerned.

Considering then that the decisions which will take place in such instances will inevitably comprise a not negligible amount of “negotiations” (such as those that are already implied by and performed in most advanced tax ruling systems) the final outcome will be that MNEs will receive a more or less definite status – official or de facto – as members of the international community.

Certainly this is not the intention of the Pillar One approach – which, on the contrary, aims at re-asserting (or re-establishing) the supremacy of States over MNEs even though at an international level – but, as the saying goes, the roads to hell are paved with good intentions and this would not be the first case where the unintended consequences of a radical change go far beyond (and even against) its immediate scopes.

Of course, these reflections do not imply, by any means, that the route chosen is wrong. It cannot be denied, however, that this reform, as all the radical ones, must be handled with great care.



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