OECD Sees Corp. Tax Reform More Important Post-Pandemic

Efforts to change corporate tax law to ensure that digital companies are taxed fairly and establish a minimum tax rate are likely to become more important after the novel coronavirus pandemic, the Organization for Economic Cooperation and Development said Wednesday.

The OECD's report, presented to finance ministers of the Group of 20 industrial and emerging market countries in a virtual meeting, suggests that countries would seek to rebalance their tax burdens in the wake of the pandemic as economies gradually return to normal. In that environment, governments are likely to place a higher priority on addressing the tax challenges of a digitalized economy and ensuring multinational companies pay a minimum level of tax, the report said.

The OECD also said it is prepared to study both new and traditional tax policy ideas on the heels of the health and economic crisis.

The Paris-based organization is leading a group of nearly 140 jurisdictions to find a consensus on redistributing taxing rights to countries in which digital companies have consumers but lack a taxable physical presence and a minimum effective corporate tax. Some advocacy groups and scholars have argued that because digital companies are likely to benefit financially from a situation where people globally are under orders to stay at home, these companies should pay more tax.

The redistribution of taxing rights is considered the first pillar of the OECD's work to overhaul the global tax system, while the minimum tax is the second. The OECD hopes to have countries agree on both pillars by the end of the year. The organization said it is sticking to that goal, despite the widespread economic and travel restrictions governments have imposed to combat COVID-19, the respiratory disease that results from the coronavirus. 

Mohammed Al-Jadaan, the finance minister of Saudi Arabia, which is chairing the G-20 this year, said at a press conference that work on finding a global tax deal was ongoing, despite the pandemic. 

"We have not stopped. We are continuing to work with the OECD to ensure that we advance the digital economy taxation file," Al-Jadaan said. "I believe it is actually more relevant today than before as countries start to recover from the crisis and start to think about means to ensure that they repay their debt."

The G-20, chaired this year by Saudi Arabia, issued a communique after the meeting, stating it was committed to using all tools to steady economies and ensure a quick recovery "while continuing to tackle the global challenges, notably those related to addressing the tax challenges arising from the digitalization of the economy and enhancing access to opportunities." 

The OECD's report said the possibility that digital companies would profit from people being forced to stay at home, combined with the need for countries to cover budget holes, could "provide new impetus to efforts to reach agreement on Pillar 1 issues internationally." 

Moreover, the report said that as countries will need to make tough budget choices in the future, "the demand for effective global implementation [of the minimum tax proposal] will be higher" to ensure that large companies pay the same tax as small companies, which may have suffered disproportionately from the crisis.

The report said a speedy economic recovery requires proper functioning of global supply chains. The OECD urged countries not to risk sparking a trade war via unilateral digital taxes.

Earlier this year, the U.S. and France were engaged in a bitter dispute over a French tax on large digital companies, which the U.S. believed unfairly targeted American companies. The U.S. threatened to charge tariffs on a number of French goods. The two sides ultimately reached a tentative truce with France agreeing to suspend payment of the tax in the hope that an international deal could be reached by the end of the year.

The OECD's report said that while it would be premature to form guidance on tax policies for the longer term, the debate is already starting, with some commentators arguing for measures such as excess profit taxes, wealth taxes or carbon taxes.

A growing number of countries are introducing or strengthening carbon pricing, the OECD said, adding that this could be further facilitated by international cooperation and coordination.

The OECD also said countries could consider changing the current tax structure through broadening the base or raising revenue in ways that wouldn't excessively harm growth, such as taxes on immovable property and consumption.

"Further analytical work will be needed, recognizing that efforts to restore public finances have not begun and may be a while," the report said.

The report added that the current time should be used to explore avenues for tax reform and that the OECD "stands ready to explore and assess new ideas as well as more traditional ones."

--Editing by Neil Cohen.

Update: This story has been updated to include Al-Jadaan's comment. 

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