Mr Krister Andersson participated in the OECD public consultation on the tax challenges of digitalization

The OECD organised a public consultation on its tax work for the digitalized world. Proposals had been presented under two pillars, the first one would shift tax revenues from countries where innovation, production, financing and strategic decisions are made to market countries, countries in which consumption takes place. The second pillar would follow up on the US tax reform’s inclusion of a minimum tax rule and extend it to a global rule.

Some 60 countries were present at the public consultation, several NGOs, and hundreds of representatives from businesses, business groups, advisors, and academia. There was a strong recognition from all stakeholders that this project is not (and should not be) about Base Erosion and Profit Shifting of multinational firms (BEPS). Instead, it is about rearranging which country should receive corporate profit tax payments.

  • For pillar one, there was not much discussion on the user contribution proposal (the UK or EU digital tax proposal). The discussion instead focused on the US proposal of allocating part of so called residual profits stemming from market intangibles, to market countries. There was also many participants advocating that changes should be done within the existing international tax framework. The response from Johnson&Johnson therefore attracted a lot of interest. Their proposal would provide local distributors with an operating margin calculated by adjusting a base return upward or downward based on groupwide profitability and local marketing expenses. According to their response and presentation, adjustments to the base return that refer to groupwide profitability could be a mechanism for allocating some residual profit taxing rights to market countries.
  •  Pillar two attracted considerable skepticism. Despite the skepticism, however, there was also a recognition that minimum taxes may start to be introduced (regardless of Inclusive Framework consensus) and if that does happen then alignment is key.
  • In response to questions, OECD said it will try to undertake economic analysis of the options – but one sensed they were not finding that easy.

The consultation confirmed that the ongoing EESC work on taxation in the digitalized world is in line with the analysis and discussions done by the OECD and the Inclusive Framework (129 countries). Mr Andersson  emphasized the European perspective in his intervention and the need to have a consistent outcome from the proposals in the two pillars. A German government representative expressed support for such an approach. The outcome of the process of changing the allocation of tax revenues among countries will be discussed extensively during the mandate of the next Commission. It is important that the EESC takes an active part in such deliberations. The debate at the UN on these issues, must also be part of the EESC  work agenda so that a fair, and for Europe, a competitive outcome can be assured.