When work on the taxation of the digital economy kicked off as part of the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project in late 2018, there seemed to be a broad agreement that international tax rules needed an overhaul to successfully tax billion dollar tech giants like Amazon, Google and Facebook. Key to this overhaul was proposing solutions that would go beyond the arm’s length principle (ALP), the foundation of international tax rules for almost a century. No wonder then that many saw the OECD-led efforts to address taxation of the digital economy as ground-breaking. Fast forward to the end of 2020, the deadline that the OECD has set itself for reaching a consensus-based solution, the process is still ongoing and an agreement is now expected by mid-2021. What will happen now — What can we expect from the initially bold announcement, a real overhaul of existing rules or rather more of the same?

If past reform attempts offer any indication — and we think they do — those in favour of preserving existing tax rules are likely to offer resistance against threats towards their dominant position. In our recent paper, Rebecca Engebretsen and I try to understand how Defenders of the status quo have managed to oppose change for so many years. Many view the current tax regime based on the ALP as flawed, due to its methodological weaknesses and the burden it places on already strained tax administrations, especially in lower-income countries. Lessons drawn from our recent paper on efforts to promote simplified transfer pricing methods offer hints as to how we can expect defenders to react in the current debate on international taxation.

Ignoring the threat as long as possible

In the case of simplified methods, it took a long time before alternative approaches were discussed at the international stage. When Brazil and Argentina started innovating with simplified methods seen as breaking with the international consensus in the late 1990s, the OECD paid little notice. In the absence of a real perceived threat, Defenders can be expected to ignore alternatives. In the current debate on the digital economy, this strategy no longer appears feasible as the failure to tax digital companies is undermining even the tax base of powerful OECD countries, thus making the need for action hard to ignore.

Trying to pacify threats by offering placebo reforms

When turning a blind eye is no longer feasible, signalling openness to opponents’ concerns might be necessary. This can be done through what we label bridging solutions: seemingly offering some concession to reform but with the result that alternative views, such as simplified methods, are brought in line, resulting in little change. In the current debate on digitalisation, there appears to be ample opportunities for such placebo reforms; allowing consolidated profits to be taxed in countries without physical presence but ensuring that the share is so tiny that it is in essence insignificant. Additionally, tweaking the technical details in such a way that the minimum tax rate does not have the promised effect. From the point of view of the Defenders, both efforts will positively have the effect of amalgamating alternative views with the status quo.

Trying to settle the debate by co-opting opponents

If the long-standing practice of dialogue by invitation proves untenable, the introduction of public consultations can be a low-cost engagement strategy to gauge the temperature of the debate while maintaining control over how to manage feedback. In our paper we argue that the OECD Inclusive Framework (IF) could be understood as an elaborate version of the engagement strategy: it looks flattering to those participating but in reality it disguises the fact that developing and emerging countries are made to gather under the terms of the OECD, in effect making it harder to oppose the dominant view. It might seem that the IF still remains co-opted; the notable difference between the first announcement by the IF on the digital economy in January 2019 and the program of work it published early 2020 illustrates that much of the initial reform impetus has been retracted.

Attack, attack, attack

Finally, in case pressure increases on the status quo, an escalation might be required. In the case of simplified transfer pricing methods, we observed an increasingly hostile tone leading up to the 2017 revision of the OECD transfer pricing guidelines, with some questioning whether simplified methods were legitimate options at all. The escalation could also be observed through increased mobilisation; the number of actors participating in the debate intensified, often on the side of the Defenders, while the position of the opposition weakened. There are strong reasons to believe that we will see such an escalation in the public consultation just announced on pillar 1 and 2, taking place until December 2020, with countries such as the United States having already ramped up the offensive. Stakes are high as the OECD is slowly approaching a final agreement.

In the case of simplified transfer pricing methods, our paper shows how the Defenders used the above mentioned strategies to turn what started with a commitment to ‘simplify the rules and alleviate the compliance burden for both tax authorities and taxpayers’ into what some have argued is the opposite, namely more complicated and cumbersome rules. Reflecting on the transfer pricing rules after the BEPS project revisions, Joe Andrus (former OECD head of transfer pricing) and Richard Collier (tax practitioner) concluded that the transfer pricing process has become ‘far more complex’, with the tax administrations now faced with requirements of a greater ‘level of factual detail’ to establish the ALP. Moving to the current debate on digital taxation, Defenders appear to be employing similar strategies to fight current reform. Compared to the past, however, this time the landscape is significantly altered. Some OECD countries are feeling how the preservation of existing tax rules are leaving them at a significant disadvantage. Whether this will be enough to shake the solid foundation that is the international tax rules will remain to be seen.

Fritz Brugger

Fritz Brugger is senior scientist at NADEL. He holds a PhD in Development Studies from the Graduate Institute of International and Development Studies in Geneva. His research focuses on the developmental effects of natural resource extraction and on the role of extractive companies.