International taxation: where we are and where we are going.The challenges ahead
Where we are: the achievements
The last few years have seen the consolidation of the two most important pillars supporting the new institutional framework in international taxation: the OECD/ G20 Inclusive Framework on BEPS (established by the OECD in June 2016), and the Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum). The mere fact that these two organizations operate and are actively modeling the new framework of international taxation is an achievement in itself.
There have been four significant developments in this new international tax era during the last year.
The most important landmark has undoubtedly been the entry into force of the Multilateral Convention to Implement Tax Treaty related Measures to Prevent BEPS (the Multilateral Instrument, MLI, BEPS Action 15), on 1 July 2018., following the deposit of the fifth instrument of ratification by Slovenia. Currently, depositaries are Austria, the Isle of Man, Jersey, and Poland, New Zealand, Serbia, Sweden and the United Kingdom. The MLI will update the current tax treaty network and its provisions will start having effect as from 2019. This means that the new international tax standards leave the fuzzy environment of soft law to enter the juridical field of legally binding instruments.
The second important achievement has been the publication by the OECD/ G20 Inclusive Framework of the Interim Report on Tax Challenges Arising from Digitalisation (BEPS Action 1), in March 2018. The report describes the main features of digital markets and how they shape value creation. However, there are significant differences between members regarding the impact of digitalization and the subsequent measures to be taken (from those countries who think that there is no need to make changes to others who defend that future changes should not be limited to digital firms).
The third significant achievement is the publication in June 2018 of the Revised Guidance on the Application of the Transactional Profit Split Method (BEPS Action 10), which will be incorporated into the OECD Transfer Pricing Guidelines.
Finally, it is important to mention that the first exchange of the country by country reports (BEPS Action 13), already took place this year.
Where we are going: the challenges ahead
The first important challenge that the Inclusive Framework will have to tackle is to achieve a common view within the members on how the taxing rights on the income derived from cross border digital activities should be divided between the countries concerned. Apart from the different views, the Interim Report recognizes that there are countries that are eager to take interim measures to tax profits derived from value created within their jurisdictions. The Interim Report takes into consideration an excise tax on the supply of certain electronic services provided within their jurisdictions that would apply to the gross consideration paid for that supply (in line with the EU Commission proposal on digital economy of 21 March 2018). The OECD Secretariat will provide an advance of the results by June 2019 and the final report should be prepared by 2020 and we will see then whether the approach assumed by the countries and the individual measures taken will harm or not the fragile coherence of the new international tax system.
The Panama papers and the Paradise papers showed that including intermediaries within the scope of transparency rules is another urgent target. The Model of Mandatory Disclosure Rules for Common Reporting Standards (CRS) Avoidance Arrangements and Opaque Offshore Structures was adopted by the OECD on 9 March 2018, and in May 2018 the European Council adopted a directive in the same direction. Several countries are also considering the introduction of rules based on BEPS Action 12.
The above mentioned scandals also highlight the fact that whistleblowers should not be forgotten in the new international tax order. The EU Commission has already made a proposal on 23 April 2018 on whistleblower protection setting out principles to guide States when introducing or reviewing rules for whistleblowers and, in our opinion, the OECD should follow the path of the EU.
In any case, the most important challenge is to maintain and improve a fair tax system in times of globalization. From the corporate tax stand view taxation of companies where the final sale takes place could be a solution. This is in line with the EU Commission proposal on digital economy of March 2018, and could also be the approach of the US (although referred to a sale´s tax, see US Supreme Court’s recent ruling in South Dakota v. Wayfair). However, developing countries could understand that this would put them in an unfavorably position because of the size of their markets. Again, the subsequent challenge is to maintain the consensus and the coherence of the whole system.
Dr Roberto Bernales, Professor of Tax Law, University of Deusto, (Bilbao, Spain), International Tax Consultant, Attorney at law (Legalkide Lawyers). Contact: firstname.lastname@example.org