Today the Confederations of Swedish Enterprise, the Finnish Industries, the Danish Industry and the Norwegian Enterprise have submitted joint comments on the OECD Blueprint Reports on digital tax (Pillar 1) and Global minimum tax (Pillar 2). A public consultation to discuss the comments will be held on 14-15 January 2021.
As previously reported, on 12 October the OECD presented their Blueprint Reports for comments. An impact assessment was also released the same day.
In our comments to the OECD our Confederations stress the need to find a global solution to the challenges from the digitalization of the economy but note the lack of political agreement in several key issues. We request a consensus-based sustainable international tax system which is predictable, usable, enforceable and that also facilitates and supports future growth.
We urge the OECD to strike a balance between complexity and compliance issues and the policy objective at hand. In order to minimize the risk of divergent interpretation and double taxation, we consider it of utmost importance that the new rules are principle-based. However, our Confederations are concerned that what is outlined in the Blueprints is neither simple nor principle-based.
The new rules need to be compliant with EU-law. The rules under Pillar 2 and in particular the income inclusion rule, must be analyzed further since they seem to target not only abusive “wholly artificial arrangements”, but also will impact genuine commercial activities.
From small countries perspective, we express our concern about the shift of taxable income under Pillar 1 from smaller net exporting countries with high levels of R&D-activities and associated entrepreneurial risk taking to larger net importing jurisdictions with large consumer bases. We believe this shift could undermine small countries’ relative attractiveness to international businesses and may disincentivise countries from developing a good and competitive investment climate to support innovation and entrepreneurship.
For small research-intensive open economies, a report from ECIPE finds that the OECD proposals would undermine future investments in R&D, innovation and business expansion, with adverse implications for existing research clusters, education systems and high value-added jobs.
In our comments we also request more clarity concerning the treatment of losses. Many venture capital investments never generate any corporate tax revenue and very few become global players. With a residual profit split approach, the costs for innovation and development for all the failed venture capital investments would likely remain in the exporting country, while future profits for the few successes would, at least partly, be taxed in other countries, without proper recognition of the costs or pre-regime losses. It is therefore important to provide enough profits in the innovator jurisdiction to reward R&D and incentivize discovery and to allow for losses, both pre-regime and in-regime, to be carried forward on an unlimited basis.
Our Confederations are positive to the proposal to introduce an early certainty process and we encourage the OECD to have a strong focus going forward on simplification and dispute prevention measures in order to reduce future disputes. Mandatory binding arbitration is another necessary component to facilitate that mutual agreement procedures function in a timely matter.
The introduction of unilateral measures in many jurisdictions has fueled the debate on the necessity of reaching international consensus on a global solution. When an agreement is reached on Pillars 1 and 2, we believe that such an agreement must also require the removal of any current unilateral measures in force and a political commitment by the members not to introduce such measures in the future.
Fundamental changes to the international tax system are being considered. The impact assessment states that Pillar 1 and 2 could increase global income tax revenues by USD 50-80 billion per year. Despite the fact that this started out as a project to deal with the tax challenges stemming from the digitalization of the economy, only approximately 10 per cent of the expected new tax revenue will come from digital activities. The remaining 90 per cent of the new tax revenue will be collected via a global minimum tax and business activities not linked to the digitalization of the economy.
We live in strange times…