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A Funny Thing Happened on the Way to Pillar 2Mar-05-2020

In an effort to stave off unilateral actions to tax digital commerce, the OECD is moving ahead with its aggressive timeline to grant taxing authority to market jurisdictions. In December 2019, the United States threw a potential spanner in the works, when Treasury Secretary Steven Mnuchin suggested that it would only support the OECD’s plans if they included a “safe harbour”, widely interpreted to mean a voluntary regime.


IBFD Chief Editor US, Stuart Gibson, offers his thoughtful insights into what the US position might mean for the future of Pillars 1 and 2. 


 The OECD’s work on Pillar 1 continues in fits and starts, as it lurches ahead to achieve a goal that all parties claim they support, on a schedule that contains no wiggle room. Yet as the clock ticks inexorably toward another extension, the goal seems increasingly out of reach, given recent statements by at least one key player, as well as the long-held positions of another. 


 Earlier this year, I attended the DC Bar Tax Legislative and Regulatory Update conference in Washington, DC. The last plenary session was billed as an update on the OECD’s work on Pillars 1 and 2. Pillar 1, the allocation of taxing rights over “residual profits” to market jurisdictions, and Pillar 2, “all other issues” (widely understood to mean a global minimum tax), represent the yin and yang of the OECD’s work to address taxation of the digital economy under BEPS Action 1. 


 Moderated by the unflappable Manal Corwin of KPMG, the panel included Chip Harter, US Deputy Assistant Treasury Secretary for International Tax Matters; his immediate predecessor Bob Stack, now with Deloitte; Sandy Radmanesh, Tax Attaché at the German Embassy in Washington; and Itai Grinberg, Tax Professor at Georgetown University Law Center. 


The discussion started with a description of the current status of Pillar 1, including an overview of the technical aspects of the current “unified approach” that the OECD is pursuing, and a discussion of the issues that remain to be addressed and possible future sticking points. Manal Corwin was all set to guide the panel from Pillar 1 on to Pillar 2. And then the bus drove off a cliff.


During the World Economic Forum in Davos, Switzerland, Harter's boss, Treasury Secretary Steven Mnuchin, had had a heated discussion with his French counterpart, Finance Minister Bruno Le Maire, about Mnuchin's out-of-the-blue proposal from last December to create a “safe harbour” within Pillar 1. Those two words instantly upended the discussion about Pillar 1. Many non-US tax professionals had no idea what Mnuchin meant by the term “safe harbour”. Mnuchin's explanation of what he envisioned a safe harbour would look like – making Pillar 1 optional for countries and multinationals – threatened to make the OECD’s work largely irrelevant. After all, if large US multinationals – the most obvious targets of Pillar 1 – could avoid the tax on residual profits altogether by opting out, the rest of the project to salvage Action 1 could collapse like a house of cards.


This development, discussed at length by the DC Bar panel, led to all sorts of speculation on what Mnuchin’s motives are. Why did he mention a safe harbour at all, and why now, after the OECD had developed much of the conceptual framework for a consensus solution? Was he seeking to (a) improve the US's leverage to influence the final product, (b) create an actual safe harbour, (c) give it the “old college try” and then accede to overwhelming pressure to reach a deal, (d) scuttle the entire Pillar 1 effort, or (e) achieve something else? Did he do this on purpose, or was he really indifferent to the impact these two words would have? Small wonder that the DC Bar panelists never made it to Pillar 2. (Who knows? Perhaps neither will the OECD.)


Before they left Davos, Mnuchin and Le Maire played down some of their more incendiary remarks. Pascal St. Amans declared the project back on track, with the members of the BEPS Inclusive Framework now promising to address the safe-harbour proposal later in the process. 
For now, as the OECD works through the remaining policy and technical issues on Pillar 1, the Davos incident should serve as a cautionary tale. It took just two words from one key player to place the project at risk. As for the next potential flash point, one need look no further than the upcoming meetings to discuss binding arbitration, where the irresistible force of the United States is poised to meet the immovable object of India.


Stuart D. Gibson
Chief Editor, U.S.
March 2020