Ti/en Years

Tin is one of the oldest metals known by man. It is known for its resilience, pliability and inability to rust. As the traditional material for a 10 year marriage anniversary gift, it symbolizes how successful marriages are strong yet flexible, able to be bent without broken, and not susceptible to rust.

The OECD BEPS project is celebrating its 10 year anniversary in 2022. It certainly has demonstrated more strength and flexibility than many expected at its start.?The BEPS project, in fact, has accomplished quite a lot.?For those that haven’t been in the profession that long it may be surprising to hear that the concept of global exchanges of country-by-country reports was almost unthinkable 10 years ago.?Now it’s a routine compliance exercise.?And while less visible to the public, there have been a number of other practical consequences from the initial BEPS wave that have had lasting impacts on how multi-nationals think about long-term tax planning.

The BEPS project seems to be reaching its apogee this year with the implementation of Pillar 2.?Pillar 2 is a remarkable success. The success is already evident in the announcements by various jurisdictions that they will change their corporate tax systems. Pillar 2 will effectively set a floor on global corporate tax rates at 15 percent.?Whatever one thinks about the BEPS project, the implementation of Pillar 2 is an extraordinary achievement, especially in a world that is characterized less by global order and more by global disarray.

While Pillar 2 is poised to change the fundamentals of global tax competition, Pillar 1 appears to be crumbling.?The release of the OECD public consultation document on Pillar 1 on Friday makes it clear that this is a non-workable concept. The complexity of the sourcing rules is mind-boggling; and that’s just the sourcing rules. While Hemingway once famously said “The first draft of anything is shit,” this is unfortunately not the first draft of the Pillar 1 rules.?One of the main criticisms of the arm’s length principle has been that it is difficult and costly to administer.?But these Pillar 1 draft rules do nothing to convince anyone that the alternative is any better.?

This shouldn’t be surprising. ?Pillar 2 was always easier to implement than Pillar 1.?Admittedly, this is not a new insight. The current Deputy Assistant Secretary (Multilateral Negotiations), Itai Grinberg, argued as much in 2018. The publication of the Pillar 1 consultation document just makes this more evident.

Unlike Pillar 1, Pillar 2 isn’t dependent on creating a new primary taxation right. Furthermore, while Pillar 2 was aimed at addressing tax policy issues with tax policy tools, Pillar 1 is more about addressing competition policy issues with tax policy tools.?That was always an impossible task.?Pillar 1 is aimed at making perceived high-profit companies pay their “fair share” everywhere they operate and sell, even if remotely.?But this was always a red herring.?

Persistent high profits are a sign of non-contestable markets.?In some cases, this may be the result of a policy objective.?Patent-profits are the most obvious example.?Patents are explicitly granted and even constitutionally protected, such as in the US, to incentivize innovation.?However, the rise of the data-technology industry has highlighted a new source of power and monopoly rents. Competition policy has regained renewed attention especially as the influence and power of the tech sector has come more and more into focus of the public debate.?What competition policy could achieve was inadvertently demonstrated last week when Facebook’s stock price drop resulted in the single-largest wipeout of a company’s market value in a day.?The drop was the result of the disclosure by Facebook that Apple’s privacy policies are having a material impact on its ability to monetize user data. ?

From a public policy perspective it’s questionable whether large companies should be able to unilaterally impose standards with broad impacts.?But it was a timely reminder that there are many policy tools available to tackle monopoly rents outside of an overly complex and ultimately unadministrable tax compliance system that will raise little revenue at a high cost.

The Pillar 1 effort will continue, primarily because it helps fend off other misguided tax policy efforts, such as unilateral DSTs.?In the meantime, other non-tax policy efforts will push forward and may well limit the public desire to further tax that tech company behind the tree.