BEPS and the Way Forward

Monday, September 20

Introduction
Mr. Hervé Joly, Director, Joint Vienna Institute

Panelists
Ms. Daniela Hohenwarter-Mayr, Professor for Tax Law, Deputy Head of the Institute for Business Law at the University of Vienna
Ms. Veronika Daurer, International Department, Tax Policy and Tax Law Division, Austrian Federal Ministry of Finance
Ms. Helen Pahapill, Deputy Secretary General for Tax and Customs Policy in the Estonian Federal Ministry of Finance

Moderator
Ms. Barbara Dutzler, Senior Economist, Joint Vienna Institute


The digital transformation of the economy without doubt shapes the future of taxation. While the digitalization spurs innovation, generates efficiencies, and improves services, the breadth and speed of this change introduces challenges as well as opportunities. The latest agreement of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) represents a structural change to the current international tax system, even if commentators disagree about the nature of this change—a missed opportunity, a first step towards a fairer international tax system, or a further complication leading to misbalanced outcomes. 

What are the challenges and opportunities for taxations stemming from the digitalization of the economy and e-commerce? What policy responses are being discussed for corporate taxation at OECD, EU and global level? What are the arguments for and against the current agreement? How will these measures impact the distribution of tax revenues between countries, and in particular between developed and developing countries? What will happen with current or planned unilateral digital service tax solutions? What is Austria’s position? 

To answer these questions, Prof. Daniela Hohenwarter-Mayr set the scene by giving an overview of the rationale for taxing the digital economy, the BEPS process, the recent political agreement on a global tax reform, as well as explaining the core features and remaining open questions. Notable differences from the 2020 ‘OECD Blueprint’ proposals include the expansion of scope of Pillar I.  

Figure 1: Pillar I in a nutshell

Source: Hohenwarter-Mayr, BEPS and the Way Forward, Presentation for JVI, September 20, 2021

Originally intended to create new taxing rights of market/user jurisdictions concerning big multinational enterprises in the digital economy, Pillar I now applies to all industries with the exception of extractives and regulated financial services. The historic agreement on a global minimum tax rate of 15% as encompassed in Pillar II was conceptually easier to reach, given country precedents, but still technically very complex, for instance regarding the substance carve-out rules or the backstop provided by the undertaxed payment rule. As Daniela Hohenwarter-Mayr pointed out, with only the cornerstones being agreed, the road to implementation in 2023, including the finalization of the agreement and resolution of technical details, developing model legislation, a multilateral instrument and guidance, is continuing to be very challenging.

Figure 2: Pillar II in a nutshell

Source: Hohenwarter-Mayr, BEPS and the Way Forward, Presentation for JVI, September 20, 2021 

Veronika Daurer presented her personal reflections on the historic opportunity to jointly redesign and reconstruct the international tax framework for a sustainable solution. In view of the massive changes in the perception of politicians, lawmakers, and citizens on the fitness for purpose of the international tax rules, aggressive tax planning was no longer tolerated and there was political commitment and support for change. This was also a key consideration for Austria’s support of the agreement.  

Veronika Daurer further underscored the need for restoring the stability of the system. Moreover, rules should not create barriers for businesses doing business globally, but compliance costs needed to remain manageable. Also tax administrations’ efforts should be worth the expected revenue gains. As the previous speaker, she pointed to the many details yet to be resolved, starting with the upcoming Inclusive Framework meeting in October, where a revised version of the July statement with new agreements filling in the blanks is expected to be presented. Particularly for Pillar I, from a technical perspective core questions remained challenging, for instance how to ensure the elimination of double taxation, given that a key feature of Amount A was its conception as a reallocation of taxing rights, not an additional tax burden.  

Helen Pahapill, speaking in her official capacity representing the Estonian Ministry of Finance, presented Estonia’s position as one of the countries not yet joining the agreement. As she explained, the combination of Pillar 1, on nexus and profit allocation, with Pillar 2, on global minimum taxation and remaining BEPS issues, proved problematic. Estonia was concerned with Pillar 2 rather than Pillar 1, given the shift in emphasis on putting a floor to tax competition and its general rather than targeted approach to specific companies and tax planning strategies. With a corporate tax rate of 20%, the issue was not tax competition but rather the way in which the Estonian tax system operated, collecting the tax only when the company distributed its profits. Neither running a parallel tax system nor designing special rules and IT solutions, or building advanced accounting knowledge for tax administrators for possibly only 4 companies in 2022, seemed economical or efficient, given the small size of the Estonian tax administration. Helen Pahapill closed by remarking that the political goal of starting implementation in 2023 from a practical perspective seemed impossible, given the need to draft the respective domestic legislation. Absent a full agreement at EU/OECD on all details, the new system would fail to deliver a uniform solution for global businesses, as different countries most likely would end up choosing different implementation options.   

In response, both Veronika Daurer and Daniela Hohenwarter-Mayr agreed that the timeline was quite ambitious and the road to implementation still challenging. However, they argued that even if the international agreement was not perfect, it reflected the different interests at the table. From a pragmatic perspective, one could see the current compromise as a complete paradigm shift in the right direction, without precluding further adaptations in the future.  

Barbara Dutzler, Senior Economist, JVI

Presentation

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