Paul L. Caron

Thursday, February 25, 2021

The Corporate Tax Revolution Is Coming—Are We Ready?

Bloomberg, The Corporate Tax Revolution is Coming—Are We Ready?:

Creating a global solution for the taxation of the digital economy is right up there with finding an instant cure for climate change—seemingly impossible. Nonetheless, this has been a primary focus of the Organization for Economic Cooperation and Development (OECD) for a number of years and, with a mid-2021 deadline looming, negotiations are getting down to the wire.

The brainchild of the OECD’s efforts is a global-taxation overhaul, known as Pillar 1 and Pillar 2. These controversial proposals defy a system born in the 1920s, when determining a final destination for corporate profits was as easy as reading a business’s brick-and-mortar address. Businesses, of course, are no longer that simple—and neither is the global tax landscape, where the “digital economy” has quickly morphed into the economy itself.

Corporate profits are still taxed in the jurisdiction where a company is headquartered, however for most companies, the Internet has provided a gateway to earnings far beyond physical reach. Tech giants like Google, Facebook, and Apple know this all too well, of course, as current tax laws have enabled them to book billions in profits in low-tax jurisdictions, leaving neither footprints nor a single tax dollar in the higher-tax countries, where they were earned. Eliminating these kinds of digital-tax loopholes is what the OECD has been wrestling with since the Final Report on Base Erosion and Profit Shifting (BEPS) Action 1, “Addressing the Tax Challenges of the Digital Economy” emerged in 2015. But like any policy requiring global consensus, politics are a big part of the equation.

From a transfer pricing perspective, digital tax challenges are building for multinational companies, as well. Taxpayers already have to navigate a transparent environment with nuanced regulations changing at every border, giving way to only faint, if any, signs of tax certainty. Add to that Pillar 1 and Pillar 2, a tangled web of proposals that stand to overthrow our current tax system, unilateral digital services taxes, all of which are uniquely structured to suit the gains of individual countries; and yet another wildcard: A new administration—and treasury secretary—in Washington. The digital tax struggle has become a political tug-of-war and if things continue on this path, multinational companies could find themselves layered between old and new compliance burdens, feeling their way through a maze of unique, complicated regulations that adhere to formulas as opposed to principle. ...

While world leaders may not agree on how to enhance the architecture of Pillar 1 and Pillar 2, there does seem to be consensus that a simpler tax system is required. Yet the more we try to level the playing field, the more political interests stand to further blur the tax landscape, leading taxpayers away from what everyone agrees is definitively needed: more tax certainty. Maybe we’d have better luck trying to uncover a quick fix for climate change, after all.

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