OECD’s digital levy still raises many questions

The OECD’s credo is “Better policies for better lives” – an objective that is at once ambitious and imprecise. Hardly surprising, then, that the Paris-based OECD is inclined to tackle megaprojects. One of the goals it is currently working towards is “addressing the tax challenges raised by a digitalised economy”.

The title of this OECD project is misleading, however, as its focus is not primarily on digital companies. Instead, the OECD is attempting a total overhaul of the existing international corporate taxation system. It is certainly true that the outmoded system of international corporate taxation would benefit from modernisation following the profound changes in the global economy brought about by technological innovation. However, opinions differ widely as to the specific direction the project should take. 

New revenue sources to tackle the crisis

Generating new sources of income is a top priority for the developed countries setting the tone at the OECD. This political necessity has acquired even greater urgency due to the global coronavirus pandemic and the massive costs incurred in tackling the crisis. The call for multinational corporations to pay more tax therefore seems politically opportune, especially since some of them have done incredibly well during the crisis. The latest efforts by the EU follow a similar line: recent proposals include the introduction of additional taxes in the form of a “digital levy”.

The OECD’s proposal involves a partial re-allocation of taxes on corporate profits from the countries of production to the markets where they are sold (Pillar One). It also envisages the introduction of a minimum global tax rate on company profits (Pillar Two). Although work has been ongoing for several years, the proposals up for discussion continue to be very general and still lack concrete figures, such as the minimum tax rate or the actual degree of re-allocation. These critical parameters will only be subject to political agreement at a later date.

The OECD’s aim is to have both pillars approved at the G20 summit in Rome at the end of October 2021. This timetable is extremely ambitious, not simply due to the complexity of the undertaking, but above all because the major economic powers still have fundamentally different positions in some cases.

Banks not the focus of the OECD project

Irrespective of the specific form it eventually takes, the OECD project is a potential source of disruption for Switzerland as a business location and for the companies based here. Fortunately, the OECD’s current proposals are not focused on banks, for once. Instead, banks are to be excluded from Pillar One, along with certain other sectors. The exemption for banks is quite rightly vindicated by the sector’s high degree of regulation, specifically the requirement for a banking licence, which ties an institution to a physical location. In order to press ahead with the plans for Pillar One, it is necessary to define the exact scope of this exemption, along with effective differentiating criteria.

The global minimum tax rate proposed under Pillar Two, on the other hand, would affect all internationally active corporations above a certain size, including several Swiss banks. The restriction on international tax competition envisaged by high-taxation countries under Pillar Two is particularly damaging to countries like Switzerland with export-driven economies. The objective in the ongoing development of Pillar Two will therefore be to safeguard important, fundamental economic principles, such as operational ability and legal certainty. At the same time, suitable mitigating measures will be needed to maintain Switzerland’s appeal as a business location in a rapidly changing competitive environment.