An analysis of Pillar 1 & 2 OECD recomendations
by Prof. Pasquale Pillar 1 – Unified Approach 1. In your opinion what is the absolute scope that is trying to be reached under Pillar One – Unified Approach?
PROF PASQUALE PISTONE Prof Pasquale Pistone graduated cum laude in law at the Federico II University of Naples in 1990, obtained his doctoral degree in 2000 cum dignitate publicationis at the University of Genoa. He is Associate Professor of Tax Law at the University of Salerno and (since 2005) Professor at the WU Vienna University of Economics and Business, where he currently holds an EU Jean Monnet ad Personam Chair on European Tax Law and Policy. For his research activity on European and international tax law he has received several international awards. He is fluent in seven languages, frequent speaker at international tax conferences, editor of twenty six books, author of two monographic studies, as well as over one hundred and twenty articles on various tax issues written and/or translated in nine languages.
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The ultimate scope of Pillar One is to adjust international tax nexus and allocation to the (new) business models, which rely on global value chains, decide where to create value and can operate largely on a remote basis. In line with such models, MNEs in fact operate like stateless entities across the globe, challenging the validity of the criteria that determine liability to tax in the different jurisdictions. During the first phase of the BEPS Project, it seemed as if this phenomenon was necessarily associated with base erosion and profit shifting and only concerned digital business. However, the analysis conducted in the past few years has shown that the true challenge of Pillar One is to rethink international taxation and the exercise of taxing jurisdiction across the world in the framework of coordinated action that reflects global value creation and apportions it consistently among the countries. The political struggle among winning and losing countries (in terms of collected revenue) proves that this is easier said than done. This becomes especially clear if one considers the unprecedented alignment between tax policy reform supported by some OECD and non-OECD countries (such as for instance some EU Member States, Colombia and India) on the one hand, and other countries, on the other hand, including in particular the US. This context has generated the proliferation of unilateral levies on digital services as a reaction to the loss of revenue by some countries, which can potentially undermine the efforts of decades of international tax coordination. This is what the OECD is trying to avoid wit its promise
to deliver a comprehensive reform with worldwide acceptance by 2020. The OECD has high international credibility as the real engine of international tax reforms, due to its enormous success with the coordination of tax transparency and the fight against base erosion and profit shifting. However, this is a much harsher challenge, which should be handled in the framework of a global political compromise including also Pillar Two.
2. In light of considerations with respect to the financial services industry do you predict future complexities under the Unified Approach? Just like all other global players, the financial industry is not immune from future complexities, at least insofar as the structure of Pillar One remains the one that has been envisaged by the OECD in its last draft proposal and to the extent that the financial industry does not succeed in getting a dedicated carve-out. Together with my co-authors of the IBFD Task Force on the Digital Economy, we have been pleading against carve-outs in our academic writing, published and submitted to the OECD. Our proposal is to limit the scope of lobbying, normally associated to the establishment of a carve-out, and rather act by means of a lower allocation of taxable income to the market countries in the presence of a limited exercise of function in such countries. However, there are two more risks for the financial services industry. First, the uncoordinated levying of taxes on turnover from digital activities. Insofar as such taxes do not fall within the scope of tax treaties, in the absence of a permanent establishment in the State of the recipient of the digitally supplied financial service,
