Episode Transcript
[00:00:00] Speaker A: Foreign.
And welcome to our podcast series where we're bringing you insights into the latest developments in global tax policy and controversy. I'm Matt Andrew. I'm a managing director in A and M Global's tax practice, leading tax policy controversy. Pillar two, Value Chain Optimization. I'm really happy to be joined by Bruno Da Silva, who is one of A and M's senior advisors. So look, today we're going to spend some time on Pillar one. And I have a couple of questions for Bruno and here's a couple of questions for me. We're going to have a conversation about why Pillar one was cancelled or is now basically dead. And so the question really becomes why that occurred and also what happens next. So, Bruno, let's talk a little bit about the background. What happened with Pillar One?
[00:00:52] Speaker B: Thanks, Matt. And well, the short answer is quite simple, actually. Nothing happened. And that's precisely the problem. So the OECD spent five years negotiating a multilateral convention, as you well know, to implement the so called Amount A. So the idea of amount to A was the proxy that would allow to reallocate a share of the biggest multinational profits to the market jurisdictions.
The convention was released, there was an agreement in principle, and then, well, then it just hit the wall.
The former US Administration under President Biden couldn't get it ratified in US Congress.
Now, under the current US Administration, the prospect of American ratification has gone from unlikely to effectively zero.
The way that the multilateral convention was designed required that in order to enter into force, it needed to be ratified by at least 30 jurisdictions, including the headquarters jurisdictions of at least 60% of multinational enterprises to be expected to be within amount a scope.
Now, this cannot be met without the United States. So without the US There is no deal. And here we are. Pillar one is tall. And for most practical purposes, it's effectively dead, as it has been recently announced by some senior U.S. treasury officials.
[00:02:11] Speaker A: So what you're saying, Bruno, is we've still got this multilateral convention just kind of sitting out there, kind of hanging out there?
[00:02:19] Speaker B: Yeah, indeed it's sitting there. But. Well, there are always a few optimists that say it could still be revived, but we need to look to the facts. And for instance, if you look to some analysis made by Colombian tax authority, the dn, so they calculated that Pillar one transfers less than half percent of digital revenue to market jurisdictions. That's rather tiny if we consider the overall complexity of the rules and their related compliance administration.
So in particular, developing countries are looking and saying, well, is that it?
[00:02:54] Speaker A: Yeah.
So, Bruno, I Mean, that probably leads me to the other question, which is why did it fail? And I think you've kind of alluded to some of it already, which is the requirements of the U.S.
maybe the numbers weren't right in terms of the potential opportunity for extra taxation. But be good to get your view of why did it fail.
[00:03:15] Speaker B: Yeah, well, I think it failed because the scope was quite narrow and to be frankly, quite a little bit subjective.
Let's go back for a second. The profit reallocation format under amount A is extremely complex. I mean that's something that is acknowledged by everyone. It is untested and creates a lot of uncertainty. So just an example, some of these elements were highlighted by some expert witnesses which testified before the US House Ways and Means Committee in the context of Pillar one hearing. So they pointed out to critical elements to amount A design. For instance, Rick, Minor public testimony mentioned that the convention had vague exceptions that could actually still allow new discriminatory digital taxes in the future.
And above all, it didn't properly resolve potential double taxation. So for instance, the marketing and distribution safe harbor potentially would not solve all the double taxation issues. And as a consequence, and particularly for us MNEs could end up being taxed twice on the same profits.
[00:04:25] Speaker A: Yeah, so you've got something which is probably very narrow, not certain, blocked in Washington and really creates maybe not even an expectation of significantly extra taxing rights. So I guess that's why it's really stalled.
[00:04:45] Speaker B: Exactly. And this was all due, if we want to summarize to a mix between the process failure and the policy failure.
There was an attempt to develop a solution that took five years.
That solution was overly complex, did ensure tax certainty in particular as regards removing double taxation. And the process for the effective implementation of the Multimilateral Convention on AMAT A was rightly or not dependent on one country.
So Matt, well, let me now get a question to you.
Do you think that the OECD will come back with the Pillar one Mark two, a sort of reboot?
[00:05:29] Speaker A: Yeah, look, I think that's really why we're here, right? I mean a lot of listeners will be going, why are we even talking about Pillar one instead? Yeah, I think the current version is Bruno, but I think the OECD has already indicated that they want to work on a Mark 2 or something else that fulfills this amount high issue Amount A taxing right in the future and we even working on it later this year or early next year. And so in my view, the problem hasn't gone away.
And remember, we've been at this, the OECD has been at this since 2012 and action one, so this is now 14, 15 years. It's a long, long time. So a lot of market jurisdictions, developing ones, they're not going to sit idle. And as you know, Bruno, there's a lot of countries, a lot of treasuries, mysteries of finance which are kind of broke post Covid, they're trying to pay for things and they do feel that this is an area which is required to be taxed. And so I feel while the architecture might be different, I think there will has to be an attempt to fix the Action One issue which is now very, very old.
[00:06:49] Speaker B: Yeah, definitely. And probably it would need to be something different, right?
[00:06:56] Speaker A: I think it would. I mean, my view is it probably needs to be broader in scope, not narrower. I know we were trying to deal with a digital issue, but I feel that the cat is out of the bag, Bruno. I feel that, you know, when the US opens up to not only automated digital services, but something which was consumer products and everything, but certain industries, like elements of extractus, elements of the financial services industry, I think that sort of approach which had some merit. It was complex, but there were elements that had merit. It had some bright line tests. There was an element of formula involved and it was also based on elements which were on accounting basis, so more universal. So, yeah, I think what, even whatever needs to happen, it probably has to include those elements, but it also probably needs to be something that is acceptable to the us.
Which brings me to the next question, Bruno, around.
If there is a reboot, what mechanisms do you think we're going to look at? And here's where I think it kind of gets a little interesting. There really two paths I think on the table path One, we've got the dst, the digital services tax. Path two, maybe some type of significant economic presence or sep. And that was, if you remember back, Bruno, that was the original G24 2018 paper, one of the initial proposals in the unified approach.
[00:08:31] Speaker B: Yeah, yeah. So, yeah, let's look to the digital services taxes first. So we are talking about turnover taxes. They apply to gross revenue, not to profit.
And DSTs are actually not new. So already back in 2018, there was a proposal by the European Commission that proposed this as an interim solution that would lead then to the permanent solution which would be something along the lines of the significant economic presence.
Well, what we saw in the meantime was that several countries went through the path of the implementation of the STS. So France has one at 3%, the UK has one at 2%. Canada introduced Australia, Austria, sorry, Italy, Spain, Turkey, just recently Korea also.
So there's a fundamental problem that the US is not favorable to those DSTs, as we saw in the recent context of the trade negotiations with Canada.
We see the US looking at the STS as deliberately discriminatory against American tech companies.
We saw cases that were started or triggered by the US Trade Representative regarding Section 301.
And critically, I guess the element is that they are gross taxes, they are not income taxes, and of course that U.S. companies can claim foreign tax credits against their U.S. liability.
[00:10:04] Speaker A: Yeah, I think that, I mean, DST seems a little bit too blunt at the moment from a Washington perspective. It does feel like we're going to need to deal with something like a net tax, an income tax and maybe ECP or whatever. But it's got to be something like that. I think.
[00:10:22] Speaker B: Yeah, I agree. I mean, if you look to the ACP you already mentioned, it was the original proposal of the G24.
And the key distinction, Matt, as you mentioned, is precisely the fact that we are talking something on net corporate income tax. So not a turnover tax allows to create a taxable nexus, which is the critical element for the digital economy and allows to create these nexus based on factors like revenue in the jurisdiction, number of users, volume of digital contracts. But the tax itself, again the critical element is applied on net income.
[00:10:59] Speaker A: And I think that's important because that's something that Washington can probably work with in terms of. Or the US can work with in terms of a net taxes opposed to turnover tax.
[00:11:08] Speaker B: Absolutely. So the US can work with net income taxes. It has an entire foreign tax credit system designed exactly for that. What it cannot work is with gross taxes, which may be perceived as some sort of tariffs on imported services.
And that's why I think, and I think you agree that either the OECD or any other multilateral initiative is going to build a sustainable global frame. It's going to look something more along the lines of the significant economic presence rather than to the digital services taxes.
[00:11:41] Speaker A: Yeah, look, and I think as well, I think the SCP is kind of interesting as well because we actually do see examples of already in existence in India, for example. Colombia implemented it in 24. Kenya is looking at that as well. So I think also apart from the net piece, it's a framework which already exists.
[00:12:02] Speaker B: Yeah, I mean, you mentioned India. India is a very interesting case. They had a polarization levy which was more something along the lines of a dst and they withdrawn it and went to the Significant economic presence framework. So they introduced provisions and they are ready to start putting it into the treaty context. So they are seeing it or they're playing the long game on this.
[00:12:30] Speaker A: Yeah, exactly. Yeah. I guess the question I also had as well, Bruno, and I'm going a bit off script here, so just bear with me.
I mean, this has all been developed so far through the oecd, but I guess, you know, is there a place here for the UN as well? I mean, a lot of these countries you've talked about, like India, etc. Etc.
Actually work with both.
Some work more with the U.N. for example, as well. So just a little bit interested about how this progresses going forward as well.
[00:13:02] Speaker B: Yeah, I think it's very interesting question and we need to see how this is going to evolve. So there seems to be a momentum. If you look to the UN now there is the UN Framework Convention on International Tax Cooperation which is being negotiated through 2027.
And one of the elements of this convention is expected to cover digitalized transactions. Now, the issue is for me, will we reach an agreement in the context of the UN acknowledging that we have a significant amount of countries, we have very diverging interests. If we want a global standard, we need I think either one of these organizations, the UN or the oecd, to come with the proposal.
I think we all agree that the multilateral approach is the best.
If it's going to be at the UN level, we need to see. Personally, I have my reservations, but there is the momentum for now.
[00:14:05] Speaker A: Yeah. At least maybe then, Bruno, if it's something like an sep, which is net income, it is creditable, it is treaty compatible, it's already had some in country testing, at least then it might have a fighting chance if it can deal with elements of the certainty and the complexity as well.
[00:14:29] Speaker B: Yeah, I totally agree. I mean, I think the significant economic presence is the best or the most viable solution.
I mean, it's a solution which is also simpler to administer. It's a solution that it addresses the net corporate income tax.
It's a solution which has, well, 10 years.
And it took us 10 years to come up to the moment where we saw we didn't get to an outcome in terms of action one. So now, ten years later, maybe we go back to the original solution.
[00:15:03] Speaker A: And I think.
Let me just wrap up here.
I mean, I want to thank Bruno for his insights and comments. The real reason we're doing this podcast is because, look, Pillow One is dead.
Long live Pillar One. But it's not the end of the story. So keep looking, keep up to date with what's going to happen. We think it'll be broader. We think it'll be net income.
The debate is going on at the UN it is still going on. On a unilateral measure. Exactly what. And obviously the OECD as well. So I want to thank everyone for joining today. Stay with us as we continue this journey and our upcoming podcast.
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[00:16:10] Speaker B: Thank you.
