The current economic crisis demands the twofold corporate tax reform envisioned by the Organization for Economic Cooperation and Development, said Pascal Saint-Amans, director of its Center for Tax Policy and Administration. (Getty Images)
"The cause of both pillars is supported by the crisis," Saint-Amans said.
Faced with an even graver situation than the financial crisis of 2008-2009, the OECD, the global body managing the negotiations on tax policy, is hoping that countries can harness the energy they used then to change the current tax rules in light of the digital economy.
"When the G-20 acts together — where there is a clear objective and good cooperation — it delivers, including on difficult stuff like establishing automatic exchange of information across the world," said Saint-Amans, director of the OECD's Center for Tax Policy and Administration. The Group of 20 advanced economies asked the OECD to update its work on taxation in the digital economy in March 2017.
"We can see where there's cooperation in tax matters, the deliverables are very significant," Saint-Amans said.
He was describing the intended message of a speech that his boss, the group's secretary-general, Ángel Gurría, gave July 1 imploring the 137 delegates virtually gathered to find a way forward on the two-part tax deal, necessitated by an increasingly digitalized global economy.
"Pillar one is extremely relevant because the crisis has shown that the digitalization of the economy is something which is pervasive and will be long-standing," Saint-Amans said. "Therefore, being able to reallocate taxing rights makes a lot of sense."
The second pillar will make it harder for companies to stash profits in tax havens, a practice Saint-Amans said people aren't likely to condone, given the way taxpayers have bailed out companies to help them bounce back from the economic consequences of the COVID-19 pandemic.
Tolerance for such aggressive tax planning "will be nil," the OECD official said.
But getting to a level where countries can agree on both pillars seems difficult, if not impossible, at this stage. The U.S. said first that it wanted any agreement on pillar one to be optional, and lately has said it wants to pause negotiations on the first pillar, although it supports the second pillar.
Officials across the globe now expect that due both to the U.S. position and to the timing of its presidential election, it may be difficult to get a deal on both pillars by the end of the year.
While he maintained that the economic crisis calls for both pieces of the OECD's solution, Saint-Amans said that the decision of whether to agree on the two pillars at the same time or separately is one for the countries and territories involved in the negotiations.
"Pillar two has actually little to do with pillar one," he said. "It's a debate between member states."
Pillar two could in fact be agreed on separately from pillar one and vice versa, the OECD tax chief said.
"If you have a critical mass of like-minded countries deciding to move on pillar two, they can do [it]," he said.
The challenge in achieving a deal on the first pillar becomes clear when one looks at the differences between the proposed approach and the ongoing campaign to increase exchange of financial information between countries.
Discussion of information exchange has pitted large countries against small tax havens, according to a researcher in Denmark. Rasmus Corlin Christensen pointed to a general willingness "to coerce tax havens into change."
Regarding pillar one, he said, things are different.
"It's not big against small," Christensen said.
The U.S. is at loggerheads with large European countries, such as France, Italy, Spain and the U.K., over their digital taxes, and thus the U.S. stands on the same side as Ireland, which hosts the European headquarters of a number of big tech companies.
"The pillar two question is an easier one to frame," another tax specialist told Law360.
"Everyone wins if we get it right," said Ross Robertson, an international tax partner at BDO. The first pillar, by contrast, involves "talking about reallocation of a finite amount of profit in a zero-sum game," and as such, "naturally creates winners and losers," he said.
Katarzyna Bilicka, a professor at the Huntsman School of Business at Utah State University, agreed that countries would likely have a better time reaching consensus on the second pillar.
"Fighting against tax havens is easier than fighting against each other," she said.
Saint-Amans agreed that pillar one is much more complex.
"Of course, it's more difficult" than agreeing on automatic exchange of information, he said. "But we're talking about incremental progress. What is possible today, all things being equal, is more than what was possible when it started."
The institutions involved are more advanced than they were 12 years ago, Saint-Amans said, pointing to a host of multilateral organizations such as the OECD's Global Forum on Tax Transparency and the inclusive framework of countries and territories negotiating the global tax revamp, as well as the completion of the OECD project on base erosion and profit shifting, or BEPS.
Saint-Amans argued, too, that even in a time of increased nationalism — something he said goes beyond just President Donald Trump in the U.S. — the benefits of multilateralism in tax are recognized.
"There is the tax paradox," he said. "Even if you are a nationalist, you have a fundamental interest in tax cooperation, because it will protect your sovereignty."
"Even at a time when multilateralism is in crisis, tax has not been dropped," the OECD official said. "On the contrary, if you look at the track record of G-20 in the last three years, I think tax is probably the poster child of what the G-20 has advanced."
--Additional reporting by Alex M. Parker. Editing by Robert Rudinger and Neil Cohen.
For a reprint of this article, please contact reprints@law360.com.
