In her monthly Expert Take column, Selva Ozelli, an international tax lawyer and CPA, deals with the interface between new technologies and sustainability and presents the latest developments in taxes, AML / CFT regulations and legal questions about crypto and blockchain.
Since 2013, the Organization for Economic Cooperation and Development (OECD) has been discussing the risks of base erosion and profit shifting (BEPS) of large multinational companies (MNEs) – risks resulting from the digitization of the global economy.
In 2018 and 2019, BEPS 2.0 reports were released aiming to ensure a fairer distribution of the rights to tax the profits of large MNEs set at a global minimum tax rate to build consensus and spread unilateral measures like digital measures to prevent service taxes that could escalate into trade wars. Around 40 countries – including G20 countries such as France, India, Italy, Turkey and the UK – have introduced or announced some unilateral measures to undermine tax security, stifle investment and increase compliance and administrative costs .
At a meeting in June, the G7 countries agreed on the OECD’s BEPS 2.0 framework, which requires multinational corporations to pay their fair share of taxes in the countries in which they operate, at a global minimum of at least 15%. They also agreed to follow the UK’s lead in making climate reporting mandatory to ensure markets play their part in the net zero transition.
Related: Announcements by the G7 make green fintech flourish
On July 1, ahead of the G20 High Level Tax Symposium on Tax Policy and Climate Change, which took place last month, the OECD issued a statement that it intends to finalize the technical details of the BEPS 2.0 report by October in order to implement them by 2023.
By August, 133 of 139 member states had approved the OECD declaration, the declaration on a two-pillar solution for overcoming the tax challenges posed by the digitization of the economy. The finance ministers of the G20 countries also reaffirmed that a multilateral tax policy approach to achieve the common goal of net zero emissions by the middle of the century is the key to successfully combating climate change.
What are the new international tax rules for the global digital economy?
The globalization and digitization of the economy, which accelerated during the COVID-19 pandemic, have enabled MNEs to generate significant revenues in the market jurisdictions without paying taxes in those jurisdictions. This is due to Nexus rules which require companies to have a physical presence in a country in order to receive taxation rights. This has made it easier for MNEs to shift profits to low-tax countries.
The BEPS 2.0 Framework represents the most extensive renewal of international tax regulations in almost a century and consists of two parts / pillars.
The first pillar focuses on the distribution of profits and the nexus of MNEs. MNE corporations with worldwide sales in excess of 20 billion. Pillar One’s extensive scope – based on sales, with no distinction by activity – is based on the United States’ April proposal, “Made in America Tax Plan”.
Related: Biden’s capital gains tax plan to pull crypto from the moon to earth?
The first pillar is divided into two components: 1) a new taxation right for market areas (in which customers are resident) via a residual profit share (“Amount A”) calculated at MNE group level and 2) a fixed return for a certain base value routine marketing and sales activities (“Amount B”).
With the new allocation rules, the arm’s length principle will be partially repealed, but the transfer pricing rules will not be completely abandoned. The new system is based on transfer pricing rules, whereby “Amount A” applies to a percentage of the remaining profits (20% to 30% in order to avoid double taxation.)
The second pillar focuses on setting a minimum global tax rate of at least 15% and targets large multinational corporations with global sales in excess of 750 million euros (883 million US dollars).
If the effective tax rate of an MNE group under the second pillar is below the globally established minimum tax rate of 15%, its parent or subsidiary companies must pay additional taxes in the countries in which they are based to cover the deficiency.
Related: The Global Corporate Tax Rate: Crypto Savior or Killer?
US digital tax and regulatory developments
In support of the BEPS 2.0 negotiations, the US Trade Representative’s office opened Section 301 investigations against Austria, India, Italy, Spain, Turkey and the UK for their digital service taxes, as it did for France’s DST in January was the case. It found the measures were in conflict with applicable international tax and trade principles, leading the US to immediately suspend billions in retaliatory tariffs in June. As Nick Clegg, Head of Global Public Policy and Communications at Facebook, noted:
“One of my teams has been actively supporting the OECD Secretariat for a good two years with technical inputs to help them work this out.”
Facebook is expected to launch a stablecoin called Diem (formerly Libra) this year. The Federal Reserve is considering developing a digital dollar to enable faster payments between banks, consumers, and businesses, and has expanded its research to include stablecoins and how to regulate them effectively.
Related: The DoJ’s crypto tsar joins FinCEN in a brand new role: Why It Matters
Gary Gensler, chairman of the US Securities and Exchange Commission, said he believes the agency needs more powers – and more funding – from Congress to regulate the cryptocurrency market and protect investors with a “robust” regulatory framework for cryptocurrencies in the US, particularly in emerging markets for decentralized finance (DeFi) such as B. Lending.
This funding may come from President Joe Biden’s government infrastructure bill, approved by the U.S. Senate, as it imposes tax reporting requirements on cryptocurrency brokers that are similar to the way stockbrokers report their clients’ securities sales to the Internal Revenue Service. The provision broadly defines brokers and imposes new tax reporting obligations on crypto miners – users who lend computing power to review other users’ transactions and receive coins in return.
Related: The Senate Infrastructure Act isn’t perfect, but could the intent be right?
William Quigley – a cryptocurrency investor, co-founder of the NFT blockchain platform WAX and co-founder of the first fiat-powered stablecoin Tether (USDT) – told me, “There are major US federal agencies that categorize cryptocurrencies differently. The IRS says they are owned, the SEC calls them securities, the CFTC thinks they are commodities, and the Treasury Department considers them money. ”He also added:
“This confusion underscores the need for US Congress to step in and develop a framework for cryptocurrency policy. A framework that benefits consumers and businesses alike. ”
G20 and the tax symposium
Finance Ministers reaffirmed that reaching the common goal of net zero emissions by mid-century is a priority and that tax policies can help to achieve this goal effectively and inclusive. They recognized that countries rely on a mix of policy instruments to reduce greenhouse gas emissions and achieve their climate goals at different speeds and development paths, taking into account national specifics, different technological developments and different availability of resources necessary to finance the green transition be able . At the same time, the finance ministers recognized the importance of increased international cooperation in order to avoid possible spillover effects of one-sided approaches.
In two sessions – one moderated by the IMF Deputy Managing Director and the other by the OECD Secretary General – the finance ministers presented their views, experiences and suggestions on the use of fiscal instruments to serve ambitious strategies to contain climate change. They also discussed ways to limit the impact of climate policies on vulnerable households and tackle carbon leakage in order to avoid negative effects on international trade and growth plans.
The Italian Presidency has asked the IMF and OECD to prepare a report on the issue ahead of the October G20 Finance Ministers and Central Bank Governors meeting. Building on the results of the symposium, the report will take stock of countries’ policies for containment and adaptation.
Daniele Franco, Italy’s Minister of Economy and Finance, stressed that a multilateral approach to tax policy and climate change is key to successfully addressing this truly global challenge. All participants agreed that this dialogue should be continued and conducted both at the political level – through the consistent commitment of the G20 finance ministers and central bank governors – and at the technical level, possibly through a G20 study group.
The views, thoughts, and opinions expressed herein are solely those of the author and do not necessarily reflect the views and opinions of Cointelegraph.
Wolkenstein Özelli, Esq., CPA, is an international tax attorney and certified public accountant who regularly writes for Tax Notes, Bloomberg BNA, other publications and the OECD on tax, legal and accounting issues.