‘Plutocracy’ is viewed generally as a dirty word. The idea (if not the practice) of government by the wealthy is anathema to those who treasure democracy.
At first whiff the OECD Secretariat’s proposal for a unified worldwide approach to the taxation of the digital economy, issued for consultation earlier this month, failed the plutocratic smell test. The second whiff was, perhaps, less pungent.
The OECD-led BEPS initiative has, since 2015, produced some impressive solutions to many of the problems of the international tax system – most would agree far beyond initial expectations. Predictably, however, the biggest sticking point has been the taxation of the digital economy – Action 1 on the 15 point list. And it has not been for want of trying. The OECD and G20 gradually coaxed into the BEPS decision process no less than 134 countries, in what came to be known as the Inclusive Framework, each jurisdiction entitled to an equal vote. The Inclusive Framework has been busy during 2018 and 2019 issuing an interim report, a policy note, a public consultation document and a programme of work. The aim is to have everything in place (the remaining BEPS issues are also dealt with, but separately compartmentalized) by the end of 2020.
The work of the 134 member countries sounds very impressive; there is only one fundamental problem – they are split into three factions with significantly differing views as to what needs to be done (see Taxbreak November 5, 2018). In good democratic fashion, they were instructed to achieve consensus before the ball falls on December 31, 2020.
O ye of little faith!
The OECD Secretariat – the executive branch of that venerable club of 36 rich nations – saw chaos on the way, and has now ‘gently’ suggested its own solution, taking into account the three differing views. Although the 134 can ignore the ‘suggestion’ (or should that be the 98?), the clout of the wealthy has surely been enhanced. So, at first whiff, plutocrats rule, OK?
The proposal is, as might be expected, eminently sensible. The definition of ‘Nexus’, around since the 1920s, would – in certain circumstances – be modified to include in the tax net of a country situations where no physical presence (permanent establishment) exists. There would also be a new profit allocation rule that diverges from the traditional arms-length transfer pricing. Profits would be split into Amounts A, B and C. Amounts B and C would be fairly traditional in approach – a fixed return for marketing and distribution activities (B) with the option for a jurisdiction to claim a greater return for enhanced activities if warranted (C). Amount A is the magic ingredient, allocating a portion of the deemed residual profit of a multinational group – the non-routine profits – to the market jurisdictions after stripping out that element attributable to other factors such as trade intangibles, capital and risk. The concept is only to apply the rules to large multinationals using a suitable key – probably revenue, and to try and keep the allocation of residual profit as simple as possible.
Taking a second whiff, It is just possible that the OECD Secretariat’s motive in issuing the proposal is entirely anti-Plutocratic. The jurisdiction with the most to lose from the digital tax reform is the US which has nurtured the likes of Facebook, Apple, Amazon, Netflix and Google (the FAANGS). Realization of that fact has been reflected in that great nation’s approach to countries going it alone (eg France with its Digital Tax). The support of the No 1 international tax body is likely to give smaller nations (not to mention the not-so-smaller ones) the courage to resist pressure and ensure there is ultimately compromise rather than steamrolling. The alternative would be no agreement, and further spreading of the unilateral taxes that have been popping up recently, undermining the underbelly of the entire system.
2020 should be an interesting year.