When it comes to global tax reform, you ain't seen nothing yet. There is more in store, mainly for multinational corporations, even Israeli start-ups with foreign customers. Three weeks ago, G20 finance ministers and central bank governors met in Japan. Last weekend it was the turn of the G20 leaders, the presidents and prime ministers. The OECD issued a report to the G20 leaders on redistributing corporate profits to where value is created – a kind of Robin Hood plan. Google also issued a statement to the G20 asking to be taxed fairly. The US White House issued a FactSheet on June 27 concurring. Israel is not in the G20 but it is part of the OECD. What did Google say? Karan Bhatia, vice president of government affairs and public policy, published a statement on June 27 entitled, “It's time for a new international tax deal.” While some have raised concerns about where Google pays taxes, Google claims its overall global tax rate has been more than 23% for the past 10 years. Some countries are considering going it alone, imposing new taxes on foreign companies. Google hopes governments can develop a consensus around a new framework for fair taxation. Google strongly supports the OECD's work to end the current uncertainty and develop new tax principles. Comment: Google reported only 12% tax in their 2018 10-K filing with the SEC. What the G20 leaders said: The G20 closing communique endorsed the OECD Robin Hood plan: “We welcome the recent progress on addressing the tax challenges arising from digitalization and endorse the ambitious work program that consists of a two-pillar approach. We will redouble our efforts for a consensus-based solution by 2020.” The two-pillar approach? This has nothing to do with Sodom and Gemorrah, but it may be taken with a pinch of salt. The OECD report to the G20 leaders explains its two-pillar approach to international tax reform as follows. Pillar One focuses on changing the allocation of profit and taxing rights between countries. Pillar Two focuses on other (base erosion and profit shifting) tax issues and would give countries a right to “tax back” if other countries have low levels of taxation. The OECD issued a preliminary public consultation document in February 2019 with initial ideas and received more than 200 written submissions (including one from us saying multiple taxation must be avoided). The OECD is aiming to supply new rules by the end of the year for allocating profit to countries without upsetting the business community nor countries that matter (e.g., the US). The OECD has outlined three proposals it is working on. OECD proposals: The old approach of taxing physical presence (“permanent establishment”) is out. The intention is to tax economic presence somehow. The first OECD profit allocation proposal is called the “modified residual profit split method.” It involves four steps: (i) determine total profit to be split; (ii) remove “routine” profit; (iii) determine the portion of the non-routine profit; and (iv) allocate such non-routine profit to relevant market jurisdictions, using an allocation key. So a non-routine super profit might be allocated to where customers are, or where market expenses are incurred. A second OECD proposal is called the “fractional apportionment method.” It would apparently involve allocating the total profit of a non-resident enterprise among market jurisdictions based on an allocation key, not just a non-routine profit. A third OECD proposal is called the “distribution approach.” One possibility would be to specify a baseline profit in the market jurisdiction for marketing distribution and user-related activities or where there are profitable marketing intangible assets. Comments: These proposals for carving up the profit cake are not yet ready for human consumption. The OECD boffins need to come up with an agreed formula that is easy for corporations and tax authorities to apply, without shrinking the tax revenues of the USA or any other onshore country. This involves economic and political consensus and attention to many details. The OECD promises to carry out economic analysis and impact assessment of its proposals. What should corporations do? Anyone in international trade, digital services or e-commerce should monitor developments. That means most of us. The changes could be with us by 2020 or 2021. Our guess is that given the lack of patience most governments are exhibiting, the 2017 US tax reform might serve as a model, just like FATCA was for the OECD Common Reporting Standard (automatic information exchange). Unfortunately, there are still bugs in the US tax reform. Bring back Robin Hood. As always, consult experienced tax advisers in each country at an early stage in specific cases. leon@h2cat.com The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd.
