On December 3, 2019 Treasury Secretary Steven Mnuchin wrote to the OECD Secretary General José Angel Gurría stating the US Administration’s support for the ongoing Programme of Work adopted by the Inclusive Framework on BEPS. The Programme of Work is focused on the tax challenges raised by the digitalization of the economy, commonly referred to as BEPS 2.0 in the taxpayer and advisor community (albeit not by the OECD itself).
Specifically, the US Administration favors pursuing Pillar One as a safe harbor only, citing greater tax certainty on the part of taxpayers as a trade-off for transfer pricing rules that go beyond the arm’s-length principle. The US Administration strongly favors Pillar Two. In the letter, Secretary Mnuchin expresses “…serious concerns regarding potential mandatory departures from arm’s-length transfer pricing and taxable nexus standards…. Nevertheless, we believe that taxpayer concerns could be addressed and the goals of Pillar 1 could be substantially achieved by making Pillar 1 a safe-harbor regime. The Administration also fully supports a GILTI-like Pillar 2 solution.” The letter concludes with a statement that the United States urges “all countries to suspend digital services tax initiatives, in order to allow the OECD to successfully reach a multilateral agreement.”
The OECD Secretary General responded on December 4, 2019, citing US tax reform as setting the framework conditions for this initiative. Secretary General Gurría also personally thanked Secretary Mnuchin for expanding the scope of the current initiative from digital services to marketing intangibles more broadly (which was reflected in the Unified Approach to Pillar One by the pivot to include consumer-facing businesses) and championing the new nexus concept and formulaic approach. Secretary Mnuchin is now advocating that the new nexus and formulaic approach should be a safe harbor that taxpayers may electto avail themselves of tax certainty (under the presumption the dispute resolution mechanism for Amount C is fully functional and sustainable). Secretary General Gurría raises a concern that consensus may be hard to reach within the Inclusive Framework based on the proposal of limiting Pillar One to a safe-harbor regime.
Great uncertainty remains regarding the potential outcome of the Programme of Work. Given the tight deadlines to achieve consensus, the scope of Pillar One may have to be scaled back such that more industries are excluded (in addition to extractive industries and financial services) from the provisions and the threshold for Amount A may have to be set at a level that only impacts taxpayers that sustain exceptionally high operating margins.
OECD issues guidance on transfer pricing implications of COVID-19
The Guidance is not prescriptive and leaves solutions to the issues that it raises unanswered. We note that the Guidance is not binding on tax administrations...