GENERAL OBSERVATIONS
The 2 days were very focused in getting real-time public stake-holder’s inputs during he sessions, with countries Tax Administration representatives mainly observing the dynamics. The very collaborative & inclusive nature of the session was very appreciated by attendees.
PILLAR 1 DISCUSSION:
FINALLY OUT OF THE RING-FENCING DISCUSSION
Almost general acceptance that this is an overall economy topic and ring-fencing not necessary nor appropriate. Someone pointed that “there is no real difference between a marketplace intermediary and a financial intermediary”.
ON CONSENSUS & TIMING CONCERNS
Commitment to work for tax system change was shown by all stake-holders.
Any solution must accommodate future changes and not just current situation.
Getting the BEPS Inclusive Framework 129 countries coalition consensus will be a challenge as there will be winners and losers.
For some it is not possible to reach deep & general consensus, universally binding dispute resolution and to do it all in two years.
For others timeline to consensus is triggered by unilateral measures and the fact that there is a mandate for a quick resolution because countries’ need for revenue is urgent.
Others, like DET3, we are of the opinion that the international tax community needs to focus on timely solutions now. The sooner we are all “hands on” on alternatives, the better.
ON NEXT STEPS & PROCESS
TFDE) is currently developing a work program for discussion and approval by the Inclusive Framework by the end of May. The “hard technical work” on the alternatives will be between May and 2019 end or 2020 January, when a progress document for discussion will be presented.
ON THE IMPACT OF ANY NEW MEASURE
- Deep
articulation of principles required by some of the participants.
- Some preferred a solution based on a value creation framework instead of a destination framework cause of potential economic distortions.
- Important for any solution to
take into account the cost of capital and how it affects trade and investments.
If education & innovation country is not rewarded, incentive to invest
decreases, with potential impact on environment & climate change.
Any solution must have balance between the reward to innovation and the reward to destination. Any residual allocation of taxing rights should not provide much taxing power to market countries.
- Adopting some of these tax proposals could undermine the ability of potential creditors to assess a company’s solvency risk (likely referring on stand-alone legal entity basis).
- Any proposal adopted must be simple enough to be enforced throughout the world.
ON ARM´S LENGH PRINCIPLE TUNNING AS THE SOLUTION
- For some stake holders, TP is the principle to protect at maximum, but others welcome a shift to a greater use of formulary-based methods.
- Trade Unions: TP rules & the arm’s length principle are “a recipe for fragmentation.” They support moving to formulary apportionment and disputes the notion that nations cannot agree on a formula.
- Commentators like DET3 indicated that if to a right work in selecting the factors and the combination of those, it can be a very rational representation of facts & circumstances and ultimately value creation. But just 3 factors won’t do it. See DET3 suggestion/proposal contained in our comments.
- A movement to the location of “value realization” concept (versus creation) was also suggested by a scholar.
- Any move away from the arm’s length principle should be based on a deep principled approach in the opinion of some.
- Distinctions should be made between distributors versus component manufacturers, raw material manufacturers, or intermediate goods manufactures.
- A number of observators asked to just improve the Arm’s length standard rather than Pillar 1 options, as it is based on sound economic principles, though it may need be tweaked to achieve fairness.
- It was mentioned that TP is not about transactions but about allocation of profits, and if changing Art.9 to introduce un-related transactions/activities coverage was an option?.
BALANCING THE 3 PROPOSALS
- User participation was the less accepted option in general as it may not lead to the same amount of value in different businesses, can cause distortions and ring fences.
- Formulary solutions or SEP,
perhaps with rebuttable presumptions, safe harbors, and controlling mechanisms
were mentioned by many of the commentators.
- Many stakeholders, including
DET3, pointed that SEP and the economic presence test would more
comprehensively address the international tax challenges arising from the
digitalization of the economy. In our view it can be a good enough technical path
to articulate a transition to the future international taxation system.
- Marketing intangibles
option (MI) liked by many commentators. Spirit in the air that day little more inclined
to this option although many pointed the absence of development of the SEP
alternative as a reason for a limited analysis on it versus MI.
The problem with marketing intangibles approaches almost everyone agreed is complexity and many mentions to the fact that MNEs sell cause of great products and not only great marketing. Marketing intangible not to be overvalued.
Also, the determination of where is consumers
demand generated, if locally or through external efforts??
- Although the OECD provided a hybrid alternative joining user and marketing intangible options, almost no reference was made to such.
- Certainty over accuracy preferred by the business representative’s majority.
MNES COOPERATION
Johnson & Johnso proposal, departing from AL but traceable, simple and providing certainty to resolve the perceived market country under compensation.
Some representatives urged the OECD to do impact assessment about the options on the table with real data.
Richard Bradbury said the OECD lacks access to needed data to evaluate impact and they would really appreciate companies to share their insights or impact analysis on their business with the OECD on a confidential basis.
PILLAR 2 DISCUSSION
Surprise in part of the audience about this pillar sudden emergence. Many controversies.
Some
mentioning that a minimum tax would relive tension from Pillar 1, others
questioning it frontally cause of the potential damage to economy of this new
rules on top of the existing measures.
Focus should be addressed to low/no economic activity and substance. Substance test to manage any income inclusion or
deduction denial rule. Something we clearly
endorse from DET3.
Commentators pointed that any minimum tax should work on foreign consolidated accounting basis using ultimate parent financials and imposing the tax at the ultimate parent level.
