- And to the David R. Tillinghast Lecture.
This is our 24th David
R. Tillinghast Lecture.
I am David Rosenbloom.
I am the director of the
International Tax Program.
I know many of you in the room.
And we have a full complement
of our current ITP students in the room.
This year we are very
happy and very honored
to have as our Tillinghast
lecturer Barbara Angus
whom, again, most of you know.
Barbara has a very distinguished
career in taxation,
and particularly international taxation.
She has served on three separate occasions
in the United States government,
twice in the Congress,
once in the Joint Committee,
and once in the Ways and Means Committee,
and once as international tax counsel
in the U.S. Treasury Department.
She has a very thorough knowledge
of how the government works.
She was very much involved,
she was telling us before
but will not be speaking about today,
the development of the Tax
Cuts and Jobs Act in 2017.
In addition, I think Barbara has had
pretty close to two decades,
if not two full decades,
in private practice in law
firm, and in accounting firms,
so I cannot think of anyone
who would be better qualified
to speak to us this evening than Barbara.
And so let us welcome her.
And she is going to talk about
International Tax
Reform: The New Frontier.
Barbara.
(audience applauding)
- Thank you, David, for the invitation
to present this year's
Tillinghast Lecture.
It's an honor to be a
part of this annual event
that pays tribute to David
Tillinghast's many contributions
to the world of international tax.
His is a name that I certainly remember
from my first foray into
the 900 sections of the Code
back as a tax associate in Chicago
in the very early days of the
Internal Revenue Code of 1986.
And so thank you all for being here
to help remember his legacy.
As I was preparing for this talk
I wondered more than once
what he would think
about where we are today.
As David said, my title is
International Tax
Reform: The New Frontier.
I actually realized after
I submitted that title
that given my recent
adventure on Capitol Hill
that some would assume that
I would be talking about
TCJA 2.0: Guiltier, More Beat.
(audience chuckling)
But that's not what I had in mind.
So, the new frontier
that I was thinking about
is multilateralism, sort
of extreme multilateralism.
So, my focus is on the current
OECD Inclusive Framework project
on addressing the tax challenges
of the digitalization of the economy.
And the emphasis for tonight
is on the Inclusive Framework
which, as of today, stands
at 134 jurisdictions.
Can that large and that
diverse a group of countries
really work together to develop, agree,
and implement a complex set
of international tax rules?
And can they apply those
rules in the same way,
consistently, on an ongoing basis?
The ambitions of this current OECD project
would really break new
ground for the OECD.
Yes, the BEPS project paved the way,
but this project seems
different from the BEPS project
in ways that make a real difference.
It's true that I, like
I suspect many of you,
was skeptical at the start
of the BEPS project in 2013
and would not have
predicted all the change
that has come from that project.
It's also true that, you
can tell from my accent,
that I'm an American
so my view is likely colored
by the national tendency
to want to chart our own way
and to resist having to conform,
both with respect to taxes
and a lot of other things as well.
Plus, having recently been involved
in the U.S. tax reform process
the thought of legislating in concert
with 133 of one's closest
friends is really daunting.
So I thought it would...
I was interested in taking
the time to look back
at the recent and
historic work of the OECD
to see what it can tell us
about the path for the current project.
Is what the OECD undertaking now
as unprecedented as it seems,
or is it really just an incremental move
and extension of prior OECD activity?
My thinking tonight
is to start by looking at
the current project and the BEPS project
with a focus on the
similarities and the differences
and then turning to
the Inclusive Framework
through which this project is being done.
What is it, how does it operate,
what has it done?
And then I will focus in particular
on the work of the Inclusive Framework
on the BEPS minimum standards
which are the elements of the BEPS project
for which countries made commitments.
And that kind of commitment
is central to the current project.
I'll touch a little bit on some of
the more traditional
work of the OECD as well.
And then finally I'll circle back
to what this experience
may tell us about the future
of the current OECD project.
I have to say that as I dug
into that recent history
and spent time looking at the process
I was a little surprised by what I found.
The Inclusive Framework
has been quite active
since its creation and the release
of the final BEPS reports four years ago.
And looking back at all
of those documents now,
some of the OECD's post-BEPS output,
including some of the
statements that they make,
really take on some new significance
when you read them with
the benefit of hindsight
and with the knowledge of
what the OECD is doing now.
I feel a little bit if we had parsed
some of those words the right way,
we could have predicted that
this project would happen.
But I guess that is the
benefit of hindsight.
So, starting first with
how this project compares
to the BEPS project.
How substantial and
meaningful are the differences
between the projects?
I thought about the things that seem
the most significant to me
about this current project,
the project that has digital in its name
but goes well beyond digital,
and that intends to revise
some of the cornerstone elements
of the international tax system,
the profit allocation
rules and the nexus rules,
and replace them with
new, more formulaic rules,
and at the same time,
in a separate project,
developed new global minimum tax rules
which is really a completely
new area for the OECD.
First thing that, to me, is
significant about this project
is that it really goes to
the core matter of taxing,
of right to tax, and
division of the right to tax.
It is a project that by its definition
will involve winners and losers.
For every country that gets
an additional dollar of taxing rights,
for every market jurisdiction
that gets the benefit
of the additional taxing rights,
some other country or countries
have to give up a dollar of taxing rights.
And are countries really
prepared to do that,
and agree to do that,
and apply it consistently
and systematically?
There are obviously revenue implications.
The project could be a
significant revenue loser
for countries that are not
big market jurisdictions.
And sort of fundamental taxing rights
go to the core of
sovereignty for countries.
It is their basic right.
And so, something that
causes this kind of change
seems pretty fundamental.
It also goes to the core
matter of tax rights,
which is also a question of sovereignty.
It wasn't that long ago,
it was in one of my prior
stints in the government
in the early 2000s, in 2001,
when the OECD, working
on the then referred to
as Harmful Tax Practices project
made a decision that it wasn't
gonna focus on tax rates
and took the position which
it's followed since then
that a low tax rate
itself is not something
that is considered harmful
or inappropriate competition.
That tax rates are about...
They are sort of the
definition of competition.
And while the minimum
tax rules in this project
are not about dictating
tax rates that a country must impose,
the minimum tax rules would say
if you choose to impose a rate
below whatever is the agreed minimum rate
then other countries will be allowed,
perhaps even encouraged, to take action
and assert jurisdiction in some form
over income that is by rights your income.
And that feels like...
It's hard to say that that isn't also
a matter of sovereignty.
So, 134 countries reaching
agreement on those things
and that agreement holding year to year
seems really ambitious.
The project also, as I said at the outset,
implicates fundamental building blocks
of the international tax system.
It moves away from principles
that the OECD has advocated,
proselytized about, for many years,
sort of moving away from
the arm's length principle
and replacing it with
a formulaic approach.
Who would have ever thought that the OECD
would be advocating a
direction in that move?
And by doing that it deviates
from the underlying economics.
And so, now you're asking
countries to reach agreement,
sustained agreement on something
that isn't grounded in principles
in the way that many believe
the current system is.
It also involves incredibly
complex technical issues.
Difficult design questions
for these new rules.
How are these new rules setup?
How do you determine these formulas?
And then on top of that,
because the objective is
not to completely replace
the existing transfer pricing rules,
there are equally
difficult design questions
about how the new rules will
mesh with the old rules,
how to make those connections.
The fifth component of this project
that I think is important,
and a challenge for the OECD,
is that it involves really complex
tax administration issues.
It will require huge new and
different types of information.
The BEPS project just brought us
country-by-country reporting.
That information is
not well suited for use
for either of these two new
elements of this project.
In fact, it would be very dangerous
if that information were used.
So there will need to be
a new set of information
that will have to be provided,
collected, shared among countries,
and evaluated and understood
by tax administrations.
And then with all that
we talked about before
it would seem obvious
that it will put strain
on already overtaxed dispute
resolution mechanisms.
And so, are there new mechanisms,
are there new more multilateral mechanisms
that can be created?
Another thing that is...
So, the next item with
respect to this project
is the fact that this is a project
that needs full consensus
of all participants.
So, a consensus project
where countries agree and commit
to implement the rules
that they have agreed to
is not the norm for the OECD.
And it was not...
Most of the BEPS project was not done
on a consensus commitment basis.
Most of the BEPS project
was best practices and recommendations
with the idea,
and there was a lot of
discussion at the time,
that there were frameworks set out
and that maybe eventually
rules would converge.
But it wasn't sort of a commitment
to implement and monitoring,
except with respect to four elements
of the BEPS project.
Those elements which were
referred to as minimum standards
really didn't go to fundamental issues
the way that this consensus
goes to the most fundamental issue.
The eighth on my list is
the aggressive timeline.
We thought that the BEPS project
had a pretty ambitious timeline
of starting in February of
2013 with the first report
and issuing final reports
in October of 2015.
Barely having done that,
the OECD is now looking to
shave a year off of that
and they issued the first
report in this project
in February of 2019, and they are saying
they will reach full
consensus by the end of 2015.
And if they're keeping
to the G20 schedule,
the end of 2015 isn't
December, it's November
when the G20 leaders
are scheduled to meet.
That is a really aggressive timeline.
Ninth on my list is the political element.
There is a huge political
and public spotlight on this project.
That was true of the BEPS project as well.
I think there are both
benefits and detriments
to having that kind of attention paid.
I know that I cringe
every time I hear someone
talk about the timeline in
this current project as being
we will reach high level
conceptual agreement
by the end of 2019
and then we'll fill in
the technical details.
As a tax person it really hurts
to think about the technical
details being an afterthought,
particularly when
they're that fundamental.
Since that took me to nine
and I thought I should have 10 on my list,
my last comparison to the BEPS project
is that this project lacks a catchy name.
And if you have to say,
"Addressing the tax challenges
"of the digitalization of the economy,"
every time you mention the project,
you need to build another
year or two into the project.
Perhaps the OECD should come
up with another, a catchy name.
Some use BEPS 2.0,
but that I think understates the project
because it is, in my view,
so much bigger than the BEPS project was.
So, with that, I thought
I'd talk a little bit
about the Inclusive Framework.
You see that referenced all the time.
Inclusive Framework has made
decisions about this project.
Things are being studied
by the Inclusive Framework.
It is an interesting animal.
It was created after the release
of the BEPS Final Reports.
It has been involved in all
of the follow-up work on BEPS,
and it has been involved
in the current project,
the one without a name,
since the outset.
So, when evaluating the current
project and how it compares
I think the involvement
of the Inclusive Framework
is a really key factor.
So, currently, as I said,
there are 134 jurisdictions
that are members.
They hit 134 last month
when Namibia joined.
Breakdown of the 134
members is 36 OECD members,
two OECD accession countries,
Columbia and Costa Rica,
eight G20 countries that are
not also members of the OECD.
And that leaves 88 other jurisdictions,
most of which were not involved
in any of the development
of the BEPS project
and only were involved in
the post-Final Reports work.
Those 88 other countries include
many that I couldn't find on a map
and many that didn't exist
or didn't exist with their current names
when I was in school.
There is significant presence
of developing countries.
There also is, when you look at the list,
a little bit surprising, but significant,
presence of very low or
no-tax jurisdictions,
jurisdictions that used to be
called tax havens by the OECD,
but they don't call them that anymore.
And those jurisdictions may have been...
They may have been invited
to participate in the project
on the grounds that the OECD
was looking for a level playing field.
And so one of their efforts
at sort of bringing others into the fold.
Some may have decided to join the project
because participating in
the Inclusive Framework
is a positive factor
when you look at the
EU blacklisting effort.
It's one of those Good Housekeeping
Seal of Approval things.
There also are 14
international organizations
and regional organizations
that are participating in the project,
including the IMF, the World Bank, the UN,
the World Customs Organization,
and a variety of regional
tax organizations,
so they're supporting the
efforts of developing countries.
Membership in the Inclusive Framework
requires that the jurisdiction commit
to the comprehensive BEPS package
and pay an annual membership fee
which currently is 20,500 euro,
although there are reduced rates
available for developing countries.
And decisions on formal invitations
to join the Inclusive Framework
are made by the Inclusive Framework itself
working with the OECD Council.
So, the group is really truly open
in the sense that the group itself
can decide who it invites to join.
The group was created through a mandate
by the G20 in the fall of 2015.
So, in the G20 leaders' communique
coming out of that meeting,
Turkey was the chair then,
included a sentence that said,
"To monitor the implementation
of the BEPS project globally
"we call on the OECD to
develop an inclusive framework
"by early 2016, with the involvement
"of interested non-G20
countries and jurisdictions
"which commit to implement
the BEPS project,
"including developing
economies, on an equal footing."
So, that was another
point in the BEPS project
when I was really skeptical.
So, even though the
project, it just developed,
it just delivered 15 final reports
I couldn't imagine that they
could open the project up
and have all of these
countries participate
on an equal footing.
But very quickly the Inclusive Framework
was developed by the OECD.
It was endorsed in February 2016
by the G20 finance ministers.
And this time, their endorsement of it
focused on the need to ensure
a consistent global approach.
And also referenced their interest
in recognizing and supporting
the specific challenges
that are faced by developing countries,
and that the implementation should be...
Their implementation challenges
should be appropriately addressed.
So, the operating architecture
of the Inclusive Framework
covers membership, participation,
and the focus areas.
It includes all interested
and committed jurisdictions
on an equal footing with the OECD and G20,
so there's no longer a
distinction in label.
They're all members of
the Inclusive Framework.
And they work on both
BEPS standard setting
and on BEPS implementation monitoring.
And the members of the Inclusive Framework
participate in all the BEPS work
at the Committee on Fiscal Affairs
and all the technical
working groups of the OECD.
So those groups that used to be
people from 35 or 36 countries
sitting around the table debating a comma
in an article of the Model Treaty
now could be up to 134
countries debating that comma.
And interestingly,
not all of those countries
that might debate that comma
have signed on to the Model,
so it's a different dynamic.
The Framework's mandate is
focused largely on the review
of the implementation of
the BEPS minimum standards.
And those are rules related
to harmful tax practices,
addressing treaty abuse,
country-by-country reporting,
and improving dispute resolution.
The Framework does have
some other responsibilities,
and they were set out in
the original architecture
as ensuring implementation
of the rest of the BEPS
package is not overlooked.
It has not been overlooked,
thanks in large measure to
the European Commission.
Monitoring work related
to the tax challenges
of the digital economy and
measuring the impact of BEPS.
Those words did not seem as significant
in February of 2016 as they seem today.
And then supporting
countries in implementation,
particularly developing countries.
Like all OECD bodies,
the Inclusive Framework
is governed through a steering committee
which has a mix of countries
that is supposed to reflect the balance
of the mix of the
countries in the framework.
And interestingly, the initial mandate
for the Inclusive
Framework isn't until 2020,
although I have not heard any discussion
of whether that will be reviewed.
It got up and running pretty quickly.
The first meeting was in June of 2016
and there were, at that point
there were 82 member countries.
So, 36 countries that were joining the
OECD and G20 countries
already in that first meeting.
The Inclusive Framework has done some work
on further standard setting
with respect to BEPS.
So while there were Final
Reports issued in 2015,
they weren't the last reports.
And so, the Inclusive
Framework was involved
in the delivery of some new
transfer pricing guidelines,
including guidelines that
are under development
related to financial services,
some new treaty rules,
and some additional standards
in some other areas,
as well as all of the guidance,
additional guidance that came out
related to country-by-country reporting.
Some work that seems more like
some of the traditional
standard setting work,
or technical work of the OECD,
has been done and completed
using this larger framework.
But mostly the work has been
focused on the minimum standards.
And the minimum standards are those areas
in the BEPS project where
countries were required to commit,
so it seems worthwhile to spend
a little time looking at what those were
since we're now looking at a project
where the OECD is asking
countries to commit.
The final BEPS reports talks about
the minimum standards and says this.
"The minimum standards
were agreed in particular
"to tackle issues in cases where
"no action by some countries
"would have created negative spillovers,
"including adverse impacts
"on competitiveness in other countries."
In that way, minimum
standards were quite different
than looking for consensus
on profit allocation
because that's not just
about negative spillovers
but about avoiding
fundamental double taxation.
And then the OECD also said,
"Recognizing the need to
level the playing field,
"all OECD and G20 countries
"commit to consistent implementation."
And so there, I think,
and when you look at what
the minimum standards are,
they all have in common
that they are things
that some countries thought they should do
but didn't want to be alone in doing.
So countries were interested
in having country-by-country reporting
but they didn't want their companies
to be the only ones that had to do that.
That many of these minimum standards
were in areas where
countries wanted company
if they were gonna take the step.
The 2015 reports also reflected
the expectation that other countries
would want to protect their own tax bases
and so would decide to join this effort.
So, looking at the minimum standards,
first one is Action 5 on
Harmful Tax Practices.
That's work that dated
back in the OECD to 1998.
The work on harmful tax competition
focused on what they
then called tax havens,
but also on preferential
regimes within OECD countries.
And so in 2000, the OECD identified
47 potentially harmful regimes.
In a 2006 report the OECD concluded
that 46 of those regimes had
been abolished, or amended,
or were found to not actually be harmful.
And the one regime that
was still outstanding
when that report was issued
has since been abolished.
The Action 5 reports,
Action 5 really updated
the work on harmful tax
practices in two ways.
It incorporated a substantial
activity requirement
for any preferential regime.
So, it made the standards
for preferential regimes
significantly tougher.
And it also established a requirement
for spontaneous exchange
of information on rulings.
So for countries that had rulings,
they needed to exchange
information on those rulings
with every, sort of, just,
without request, just automatically,
every country that could potentially
be affected by the ruling.
And so the first minimum standard
related to this new substantial
activity requirement
in the Final Report it
was applied to IP regimes
using a nexus approach.
And the Final Report indicated
that that requirement also
would be applied to other regimes,
and that was work to be done
post-issuance of the report.
So that's an example of a place where
the Inclusive Framework was used
to do some standard setting.
The second minimum standard
is on this requirement
to exchange information on rulings.
It applies not just to rulings related to
preferential regimes, but to all rulings
where a lack of exchange could
give rise to BEPS concerns.
So it's a pretty broad requirement,
and the Final Report set
out a lot of the mechanics
for what kind of information
needed to be exchanged,
what rulings were covered, and what...
The specific details
that needed to be shared.
The ongoing work here of
the Inclusive Framework
is then monitoring what's happening
with both of those minimum standards,
and also considerations of
changes to those standards.
So, looking at the work on
harmful preferential regimes,
the peer review process had
already been established
before this project.
And so, what the Inclusive Framework did
was step into participating
in that process.
But it did develop
guidance on grandfathering.
It developed the substantial
activities standard
for non-IP regimes.
And it developed guidance
on data collection
for how the process would
monitor regimes in operation.
It has, to date, has reviewed 290 regimes.
They are regimes in 75
Inclusive Framework countries.
Also regimes in three other countries,
Jordan, Philippines, and Sint Maarten.
And it includes both IP
regimes and non-IP regimes.
Most of the regimes were
found to be acceptable
for one reason or another.
They were out of scope,
they weren't harmful,
they'd been amended
to be consistent with the standards,
they'd been abolished,
they were potentially harmful
but not actually harmful.
So out of the 290,
at this point they have found
four regimes to be harmful,
two of which are harmful only
because they were amended
but they had grandfathering rules
that are more generous than
the OECD standards would allow.
And there are also 35 regimes
that are still under review.
On exchange of rulings,
the Inclusive Framework had
to develop the mechanics
for reviewing what was happening
with exchange of rulings.
So, they had to develop
the peer review process
and then implement it.
They've done two peer reviews to date.
And the second one
was a follow-on to the first.
The second one was concluded
at the end of last year.
And they reviewed 92
countries during 2017.
And at that point there
were 16,000 rulings
that were in scope, that had
been issued by the end of 2017,
and there were 14,000
exchanges during 2017.
The review included 45
non-OECD G20 countries
that were members of
the Inclusive Framework,
and those three jurisdictions
that the OECD focused on
in the prior aspect of the project.
57 of the jurisdictions got through
with no recommendations for
any improvements needed.
One jurisdiction was deferred
because of a hurricane.
So, the dog at its homework, I guess.
There were 60 recommendations
for improvement
were issued to 34 countries,
and it related to technical
aspects of the process.
Of the prior review there
were 49 recommendations,
and a year later,
29 of those had been
addressed and resolved.
The last thing that the
Inclusive Framework did
with respect to harmful tax practices
was to expand the mandate,
and it related to low
and no-tax jurisdictions.
And the Inclusive
Framework made the decision
to add a substantial activity requirement
to the review of low or
no-tax jurisdictions.
So that was a pretty
significant standard setting
by this larger body.
And the first report was made, again,
in December of last year.
They reviewed 12 no or
low-tax jurisdictions
that were members of
the Inclusive Framework.
11 of them were found to be not harmful
because they had introduced
economic substance requirements.
And the 12th had introduced
an economic substance requirement
but was still in the process
of addressing a technical point.
So, pretty significant reviews there.
With respect to
country-by-country reporting,
the minimum standard there,
the OECD made recommendations
with respect to master file,
local file, and
country-by-country reporting,
but only the last is a minimum standard.
And countries committed to
implement the common template
that was included in the Final
Report in a consistent manner
and to an implementation plan to ensure
that they were sharing
information among jurisdictions
in a timely manner, with
confidentiality preserved,
and that they were using the information
in an appropriate manner.
Including a prohibition on using
the country-by-country
reporting information
to support transfer pricing adjustments.
So one wonders really what
they were using it for.
They're supposed to use it
as a risk assessment tool
but not as the support for the adjustment.
Since the Final Reports were issued
the Inclusive Framework has been involved
in issuing a lot of additional guidance
on country-by-country reporting,
including the mechanics for
the exchanges among countries.
And they developed a peer review process
that is up and operational.
The peer review process first looked at
whether countries had
the mechanism in place
for collecting
country-by-country reporting,
and requiring the filing of it,
and then it looked at
the exchange mechanism.
The first report for 2017
found that there were 60 jurisdictions
that had introduced legislation,
but some of them still
needed to finalize it
and get it activated.
There were...
So, 33 jurisdictions
received recommendations
that they needed to
activate their frameworks
for country-by-country reporting.
And then there were
specific recommendations
were issued to 28
jurisdictions for improvements.
And so some of the improvements
were kind of in the weeds.
The U.S. got one of those recommendations.
And the fault in the U.S. rules
was that for tax-exempt entities,
the U.S. required as the revenue number
reporting only unrelated business income
and not all revenue.
And that merited a recommendation
which the U.S. had not yet acted on.
So they were getting
pretty far into the weeds.
The most recent peer review report
came out earlier this month.
They're up to looking
at 116 jurisdictions.
More than 80 now have
the framework in place.
But 41 jurisdictions got recommendations
that they needed to get
the framework in place
and start to activate it.
And there were similar
recommendations for improvements,
including the U.S.
still needing to address
that tax-exempt entity issue.
67 jurisdictions now
have agreements in place
for the exchange of
country-by-country reporting
and there have been over 2,200 exchanges.
There are over 2,200 exchange
relationships in place.
One thing that was interesting,
so, one of the issues
that they were looking at
was confidentiality.
And I was quite surprised
to see in the report
that they did review confidentiality.
That review was done by
the Global Forum on Information Exchange
because they said it had expertise.
But they also said that it involved
sensitive issues and nonpublic information
on jurisdictions' internal
systems and procedures,
and therefore that the
results of that review
would remain confidential
and no details were
provided in the report.
So, it's been reviewed, but
we don't know what happened.
The OECD has indicated that
country-by-country reporting,
that mechanism will be reviewed in 2020.
We expect there to be a public
consultation early next year.
That is an aspect of the BEPS project
that will be significantly
affected by the current project
that will require new and
very different reporting
if they go forward with the
rules that they're looking at.
The next minimum standard
was on dispute resolution.
The Final Report sets out a commitment,
requires countries make a
commitment to a minimum standard
on specific measure to remove obstacles
to effective and efficient
mutual agreement procedures,
and mandates establishing
a monitoring mechanism.
There was also a subgroup of countries
that committed to mandatory
binding arbitration
but that was not part
of the minimum standard
because not everyone
was willing to do that.
The focus of the minimum standard is on
whether the treaty obligations
with respect to MAP are fully implemented
and whether cases are timely resolved,
whether the administrative processes
promote prevention of disputes
and timely resolution of disputes,
and whether taxpayers have real
and effective access to MAP.
The Inclusive Framework
took those three objectives
and turned it into 21 specific elements
that then have been the
subject of a couple of...
They're just starting the
stage two peer reviews.
So, they've got a complicated process
for looking at countries,
six or eight countries at a time.
And then all of the participants
in the Inclusive Framework
review the countries'
reports of their own status
and have the opportunity to comment
on their experience as a MAP partner.
So, there's back and forth.
The first stage reports were issued in,
started to be issued in September of 2017,
and they were voluminous reports.
The stage two reports that review
the progress made by jurisdictions,
the first one was issued last month.
And again, most of the
identified deficiencies
have been addressed.
Most countries have met
the 24-month time limit
for case resolution.
The U.S. has not.
The U.S. is at 27 months,
although down from 31 months
which is where it was in the first
review a year earlier.
The results so far are
showing that countries
have an increase in the case load,
which is likely to increase further
if they go forward with the rest
of this current project.
The last minimum standard
relates to preventing treaty abuse.
And that really is linked to
the multilateral instrument
because it is about committing
to put into your treaties
either a principal purpose test,
or a limitation on benefits test,
or some combination of both.
They've developed a peer review process
with respect to that.
They've done the first
round of peer review
with, again, voluminous reports
as to what's happening.
But most of the
implementation of the rules
with respect to this standard
is tied up with the
multilateral instrument
that has many signatories,
but so far only a few that
have effectuated the agreement,
and so it's in the early stages.
The most recent peer review report
had in the single digit
number of treaty relationships
that had been changed to
incorporate one of these standards
by reason of activation of
the multilateral instrument.
But that, those peer reviews
will continue as well.
The OECD, through this
Inclusive Framework,
has been doing a lot of
monitoring of commitments.
I'm not sure that the
results of that monitoring,
how one would evaluate the
results of that monitoring
in what are still early days.
In some cases, a third
of the jurisdictions
have not yet put their
commitments in place.
In other places, the number is much higher
with respect to the treaty-based rules.
The number is much higher
just because of the length of time
involved in the multilateral
instrument process.
I was surprised to see how much work
the Inclusive Framework had
done on standard setting,
sort of more detailed technical work.
And it does have experience there.
And so I think all of that is
important as you look forward
and think about, again,
thinking at the current project
and the reality that the
current project involves
at least one element,
at least the profit
allocation and nexus rules
the OECD is doing in the
form of full consensus,
commitment to implement,
and to apply consistently.
The minimum tax rules,
the OECD has indicated
that that will be more like
a best practices framework.
If you choose to have minimum tax rules,
they should be done this way,
but not a full commitment.
So, circling back and
thinking about this project,
I feel like the BEPS project involved
more cooperation across a
greater number of countries
post-completion of the project
than I had really focused on.
The Inclusive Framework has
been up and running for longer
and has more experience
than I had thought.
But I guess my takeaway is
I think the development
of the Inclusive Framework
is probably a positive for
the international tax rule,
and maybe particularly a positive
for this specific project.
If consistent application
and implementation
is the only key to
eliminating double taxation
then businesses need more
countries involved, not fewer.
The fact that there's broad scope here
seems like a positive,
and perhaps seems like the right direction
for future work on international tax,
although it certainly complicates things
because you have much greater diversity
and experience level in domestic law,
in history with the core instruments
like the Model Treaty and the
Transfer Pricing Guidelines.
Political involvement is
a fact of this project.
Maybe one could say it is a positive
in that the commitments to
this project need to be real.
And so, they're probably not commitments
that could be made at the level of
David and I, and others,
when we were in the Treasury Department.
It really needs to be a
political level commitment
when you're committing to something
that could involve significant swings
in the revenue of a country.
The aggressive timeline,
I certainly am a believer in deadlines
focusing one's attention.
I know that I started to work
a lot harder on my term paper
when it was just a week away.
But I also believe that deadlines
need to be realistic and feasible.
And so that dream that we've all had
that you wake up in the morning
and discover your term
paper is due that day
and you didn't even know
you were taking the class,
that does not galvanize you
to do anything productive.
And so, I continue to be concerned
about the timelines with
which the OECD is saying
they intend to pursue this project.
The kind of detailed work
that really needs to be done
both by transfer pricing
experts and treaty experts,
the input that's needed
from the business community
that understands the practicality of this,
it doesn't seem possible
to synthesize all of that
in the time allowed, unless
that time is allowed to expand.
And then, I guess, I
would say that, really,
I think what this
exercise taught me is that
what really concerns me about this project
is the fact that it involves
a fundamental relook
at the international tax architecture.
And that, to me, still
seems like a daunting task.
Perhaps better done with
more countries than fewer,
but not an easy task.
(audience applauding)
- I'm gonna throw open the
floor to some questions
if there are any out there.
I'm gonna take the liberty
of asking the first question.
And you are ideally placed
to have a reaction to this,
but you may not want to, which is this.
There seems to me to be
a gap between what's going on
in the international
organization community,
and which is widely reported.
Your lecture today was
a very ambitious summary
of what's been happening,
and a lot has been happening.
There seems to me to be a sort
of discontinuity between that
and what would be
necessary to put in place
any kind of implementing rules.
I'm curious as to what
extent the political factors
in this country are even following this.
I know that businesses are
because they're very concerned.
They're sort of pawns in what
seems to be a worldwide game.
But are the political
actors in this country...
You had two stints in the Congress.
I recently had occasion, by the way,
to tell somebody at IFA never to confuse
the statements of one branch
of the United States government
with statements of the United States.
That's a mistake people make.
Just because the Treasury says something
doesn't mean it's gonna happen.
So my question is, I mean,
where is Congress in all this?
Are they following it?
Are there people actively aware?
- That's an interesting question.
And I would say that the
tax writing communities
are following it somewhat.
But they're not really following it
because of the OECD project.
They're following it
because of their concern
about digital services
taxes around the world
and their objection to those taxes
when they target U.S. companies.
So, earlier this year we
saw a bipartisan, bicameral,
joint statement from the chairman
and ranking members of the
two tax writing committees,
which might be the only such statement
we see in the entire Congress,
condemning the French digital services tax
when it reached some
milestone back in April,
and saying that the issues
needed to be addressed
in a cooperative and coordinated fashion
through the mechanism of the OECD.
That gave me pause
until I saw that they did include
a second paragraph that said,
we look forward to reading the
results of the OECD project
and evaluating its
implications for the U.S. fisc.
So, they were not endorsing
the results of the project,
but they were saying
that it would be better
to address those issues
in a coordinated way and not
through unilateral measures.
But I don't believe that
there's much attention
being paid to the detail of the project.
And I think it's important,
that businesses should be talking
to members and staff about it.
From the Treasury Department perspective,
the U.S. Treasury is really a
driving force in this project
in a way that is fairly
unusual for OECD projects.
Often the U.S. takes a
more cautious approaches
with respect to the OECD.
But on this project, again,
I think largely because of the link
to digital services taxes,
the U.S. Treasury is very
much driving this forward.
And so you've seen Secretary
Mnuchin comment on it,
and obviously Chip Harter
is spending a great deal of time on it.
- Questions from the floor?
Anybody want to ask Barbara
anything about this?
This is one of the major
international tax
developments of our time.
Mike Leonard.
(Mike speaking indistinctly)
- Yeah, well, yeah, sure.
- [Mike] Mike Leonard,
from the UN but not speaking for the UN.
Thanks very much, Barbara.
It's very good to have
such a sort of broad level experience.
But there are critics of
the Inclusive Framework.
I know some people who
are participating in that
and they say, well, you
know, what could we do?
We have to be in it
but the nature of the beast, the speed,
the difficulty in us, you know,
with the unified approach
not even yet being public
we can't really analyze it in time.
There's meant to be a political commitment
at the end of this year.
How are we gonna explain to our ministers
what the impact is?
Even the role of the Secretariat,
which is so important,
and the key Secretariat people involved
are not from developing countries,
they're from traditional countries.
Again, this is not a UN view.
It's not even my personal view.
But how do you address
this issue of, you know,
are the hearts and minds of
non-OECD countries there?
And if they're not there,
will that matter in the implementation?
I'm just interested in your perspective
on the fact that there
are these criticisms.
- I think that's an important point.
There's involvement in the OECD,
and when you think about the involvement
in all of these working groups,
you can spend all of your time in Paris.
And most people, particularly from
the members of the Inclusive Framework,
have real jobs back at
home in their capitol,
and they can't spend all of
their time on this project.
And that's exacerbated
by the short timeframe.
I think that is a real worry.
I think you do need the hearts and minds
of countries in this project
because the commitment
can't just be on paper.
It's not just a commitment
that I support something.
For this to work, everybody
has to live that commitment
and do transfer pricing
in a different way,
including adopting formulas
that might seem arbitrary
and might cost you revenue in a case,
but you have to...
This only works if everyone does that.
And so, to me, the consensus
has to be fully informed.
And at this speed and with
the amount of pressure,
will it really be fully informed?
- Yeah, David.
- [David] I'm David Hardy.
I appreciate your comment
on the inclusiveness of this procedure.
But one of the things that you mentioned
was that the low-tax
and no-tax jurisdictions
are participating in this.
In pillar two of the digital
regime there is a minimum tax
which would allow or encourage
other countries to apply
a sort of a sop-up tax
if the low-tax country does not tax.
To me that seems like such
a fundamental assault on sovereignty
as to be impossible of resolution.
This may not be the only one.
But do you think this can be resolved?
- Well, that...
That probably is why, or
certainly might be one of
the reasons why the OECD concluded
that the global minimum
tax part of the project
doesn't need to be consensus.
It's a recommendation,
or a best practice should
you choose to follow it.
But it is hard to imagine
when you look at the list of countries
that are participating,
how are they participating
in discussions about
which country gets the
right to apply a soak-up tax
to businesses that have
operations in their jurisdiction.
Those would be interesting meetings
to be a fly on the wall for.
- Do we have any other
questions from the floor?
All right, well, with that
I'm gonna invite everybody.
We're gonna have a brief
reception at the rear of the room.
You have an opportunity
to talk to Barbara.
I have lots of questions myself,
but I don't wanna monopolize all the talk.
So, thank you very much, Barbara.
It was very interesting.
(audience applauding)
