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OECD Sends Mixed Messages at a Time of Economic Upheaval

March 13, 2020

OECD Sends Mixed Messages at a Time of Economic Upheaval

Earlier this month the OECD issued an interim assessment entitled “Coronavirus: The world economy at risk.” The report analyzed the negative effects of the disease on global GDP growth and the need for policy responses that will help support growth. However, as concerns about the effects of the virus are being assessed, the OECD is continuing to work on a plan to tax the digital economy.

Through Working Parties and the OECD Steering Committee, the organization is working on Pillar 1 and 2 proposals to deal with the tax challenges of the digitalization of the economy. Pillar 1 would reallocate taxing rights from residence countries to market countries from automated digital services (including cloud computing) and consumer facing businesses. Pillar 2 would impose a global minimum tax that would ensure all multinational profits were taxed at a minimum rate. In its February 13 economic assessment, the OECD announced it expects Pillar 1 and 2 to raise $100 billion in new taxes annually for market jurisdictions from multinational corporations.

Earlier this week the U.K. government joined France, Australia and Italy in announcing a unilateral DST starting in April 2020, and the list of governments proposing DSTs continues to grow. All of these governments have said they will repeal their unilateral measures if the OECD is able to reach consensus on the work program to reallocate profits to market jurisdictions. However, there is concern that without an agreement at the OECD level the number of countries adopting unilateral measures will continue to grow. This, in turn, will be followed by more retaliatory U.S. 301 tariffs leading to international tax chaos and further escalation of trade tensions between the U.S. and its closest trading partners around the world.

It is important to look at the big picture. On the one hand, the OECD is pointing out that the spread of the coronavirus is putting the world economy at risk, necessitating pro-growth policy responses. On the other hand, the OECD is strongly pursuing global tax policy changes that would substantially increase the corporate income tax burden on multinational corporations. Given the agreement among most economists that increasing corporate income taxes is a drag on economic growth, there is a clear inconsistency in the OECD work and its messages.

The OECD is not alone in giving mixed messages. The U.S. Administration has also expressed concern about the economic effects of the coronavirus while also working toward the successful completion of the OECD global tax work. At a time when U.S. companies are looking for policy measures that provide stability and encourage growth, these mixed messages are causing confusion and inhibiting companies’ ability to make long-term plans.

The OECD is working to reach a political agreement from the 137 members of the Inclusive Framework by July 2020, with detailed work to continue throughout the rest of 2020. There is now a 30-day travel ban between the U.S. and the EU, which will complicate any further OECD Steering Committee meetings needed to resolve the current political differences inherent in the project. As the coronavirus continues to spread, global stock indexes continue to decline and companies face increasingly complicated supply chain disruptions, the OECD’s work to provide policy recommendations for beneficial and sustainable economic growth should be a top priority. Avoiding uncoordinated unilateral tax measures and devising new tax rules are certainly worthwhile goals to pursue, but imposing a heavier tax burden on businesses worldwide at this time is certainly not the right approach.

--Cathy Schultz, Vice President for Tax Policy, NFTC