Will the OECD tax reforms collapse? Three scenarios

The OECD’s process for reform of international tax rules has just been torpedoed by the United States. As the US announced 100% tariffs on a range of goods, in response to the French digital services tax, finance minister Bruno Le Maire said on Monday that, “having demanded an international solution from the OECD, it [Washington] now isn’t sure it wants one”. Here we explore three scenarios that could emerge.

Where do things stand?

What’s the current position of the ‘BEPS 2.0’ process, after this extraordinary development? In brief, it’s pretty bad.

The OECD secretariat appeared to have gambled the success of the process, and much of its own credibility, on pushing through a deal based on a US-French agreement. The idea was that an international solution would obviate the need for the French digital services tax (DST), and therefore also avoid any US countermeasures. Now the US has announced those countermeasures anyway, and apparently signalled its intent to quit the international process.

As the Tax Justice Network and a good many others wrote in our submission to the OECD consultation on pillar one of the reforms, the ‘unified’ proposal being pushed by the OECD secretariat involved riding roughshod over the work programme agreed by the Inclusive Framework group of 134 countries, despite the claims that G24 and other countries would be given an ‘equal say’, in order to deliver a very limited reform with revenue benefits concentrated in the hands of a few OECD member countries.

Three scenarios

Two weeks ago, we reviewed the submissions to the OECD consultation and laid out three scenarios:

1. Limited reform. In this scenario, intended to meet US demands, the secretariat would deliver a reform that would redistribute little profit from tax havens, with some revenue benefit for major OECD countries and little for anyone else.
2. Process collapses due to lack of trust. In this scenario, the refusal to allow G24 countries or others the ‘equal say’ promised to the Inclusive Framework would be met by a rejection of the secretariat, and ultimately a collapse of the process.
3. Reset. Here, the threat of collapse would see the secretariat forced to make concessions to the Inclusive Framework. This would necessarily include a longer timeline, recognising that 2020 is simply too short for such a major overhaul of the rules, and an agreement to evaluate fully the three proposals that the Inclusive Framework had agreed to consider, including that of the G24.
   

These remain relevant today – but the likelihood of each has changed.

Attaching probabilities…

With the US moving to sanction France, and Bruno Le Maire indicating that US withdrawal is likely, option 1 seems increasingly improbable. Even if it is a Trump negotiating ploy, to get a ‘better’ (even more limited?) reform for US multinationals, the chances of success are poor. Nonetheless, the imbalance of power means that it remains possible that some, very weak deal will be signed off in 2020.

With the OECD secretariat’s ‘unified’ proposal having proved so divisive, option 2 (the collapse of the process) seems more likely now. Placating the US will likely lead to an even less appealing outcome for Inclusive Framework members, whose faith in the process is already stretched. But the threat of confrontation with, ultimately, the US under its current volatile leadership, may prevent outright rejection of the process.

Option 3 may provide the secretariat with a path forward: to reset the process, and seek to bring the Inclusive Framework members back into the fold. While the US seems likely to take a hostile position, even assuming that it remains within the process, the advantage for the OECD secretariat is that a longer timeline extends the process beyond the next US presidential election.

In addition, a reset of the process could allow the OECD secretariat a chance to restore trust of Inclusive Framework members, and a genuinely more realistic schedule to do the homework on analysing probable revenue redistributions for the major reforms in prospect.

But it also faces real issues: the US may simply not accept the goalposts moving, and might impose harsh sanctions on individual countries, and/or withdraw financial support for the OECD. Other OECD members, too, may be unwilling to give a genuine voice to Inclusive Framework members.

Even if the secretariat has the space to try, it may not prove possible to regain the trust of G24 countries and others in the Inclusive Framework. It will take bravery for the secretariat even to try. But the other options look unlikely, or unpalatable.

Overall, the prospects of an eventual shift to a UN forum, and away from the OECD, have become more likely this week. This could happen more quickly, following a collapse of the BEPS 2.0 process, or more slowly as an attempt to deliver limited reforms drags on into 2020. Or perhaps there is another twist in the tail, from this unpredictable and often illogical US administration…

To explore the technical and political questions at this pivotal moment for the reform of international tax rules, we are bringing together speakers from the OECD secretariat, the G24, IMF, World Bank, South Centre, BEPS Monitoring Group and other leading experts at our virtual conference on 11 December.

You can sign up by clicking the button below, and join the pre-discussions immediately on our private Slack channel.