By Greg Earl

When you are trying to shepherd 133 countries towards the biggest shake-up in global tax practice in a century, seeing the nations that you know best take separate paths can’t be reassuring. But that’s what David Bradbury faced earlier this year when New Zealand flagged it would push ahead with considering its own ‘Google tax’ on digital commerce, just a few weeks after Australia decided to hold fire.

Bradbury, head of the tax policy and statistics division of the Organisation for Economic Cooperation and Development (OECD), is facing more moves like this as countries across the globe ponder how to deal with the impact of footloose digital business on tax revenue.

France underlined this frustration in July, when despite being the current leader of the Group of Seven (G7) economic powers, it brought in a 3% turnover tax on global e-commerce giants operating within its borders.

The so-called GAFA tax (for Google, Apple, Facebook and Amazon which, notably, are all US-headquartered companies) prompted a swift response from the Trump administration, which threatened trade sanctions.

Go-it-alone approaches to a digital giants tax

Picture: David Bradbury.

In October 2018, the Australian government released its own discussion paper with ideas similar to the French, after revelations of the low tax payments made by big digital players with operations in Australia. (Google, for example, was paid A$4.3 billion by Australian businesses in 2018, but its tax bill was just A$26.5 million.)

Yet by March 2019, Australia’s treasurer, Josh Frydenberg, had ditched that approach and instead backed continued work within the OECD. A few weeks later, however, his New Zealand counterpart, Grant Robinson, was outlining options for just such a unilateral tax, prompting criticism from Chartered Accountants Australia and New Zealand that the go-it-alone approach was flawed.

Bradbury, a former assistant treasurer in Australia’s Rudd and Gillard federal governments, plays down the friction between these different approaches. “Whether or not we can achieve a global consensus will occur independent of whether countries adopt unilateral measures,” he says.

Indeed, ultimately, these go-it-alone approaches may have a positive side effect. “Some countries are taking the view that by undertaking unilateral measures they are ratcheting up the global pressure to try to reach that global agreement,” Bradbury argues. “At the OECD, it is not our role to be policing unilateral measures.”

Yet while Bradbury is cautious not to upset OECD tax negotiations by criticising individual countries, he warns that this recent outbreak of unilateral actions provides a picture of “what the world will look like without an agreement, and it has focused everyone’s mind on the urgency of the task in front of us to reach a global consensus. That is a world where countries will go off and do their own thing without any real regard for what the double tax implications might be for companies.”

Bradbury joined the OECD in 2014, building on his earlier career as a tax lawyer at Blake Dawson and as a minister in Australia’s federal Labor government until 2013. Since then, he has overseen an expansion of the way the OECD has embraced global tax policy.

The OECD is sometimes called the “rich country club”, and many OECD projects are based only on its 36 developed member countries. But its tax work has reached out to include a much bigger universe, with 150 countries involved in its tax information sharing.

Importantly, there are now 133 tax jurisdictions involved in the OECD’s base erosion and profit shifting (BEPS) project and its work to carve up digital tax rights.

“It’s not common,” Bradbury says of reaching out to countries outside the club, “but in the area of tax at the OECD we have been… expanding the potential for membership and participation beyond the traditional OECD countries.”

While France has brought in its own digital tax, and New Zealand and the UK are both talking about it, Bradbury maintains that all these countries have committed to repealing these measures if a global agreement can be reached.

“The French are very clear on this,” he says. “The hope is we can end up thrashing out a global consensus. If that happens that will be to everyone’s benefit, and we will see action to have these measures removed to everyone’s benefit.”

“The hope is we can end up thrashing outa global consensus. If that happens that will be to everyone’s benefit.”

Borders blur in the digital economy

The international tax rules were developed up to a century ago around the concept of the ‘permanent establishment’, which assumes that each company has a fixed place of business and that their income and consequent tax liabilities are generated there.

Begun in 2012, the BEPS project – officially known as the OECD/G20 Inclusive Framework on BEPS – works within that concept of ‘permanent establishment’. The BEPS website states that its 15 actions to counter tax avoidance by big multinationals aim at “ensuring that profits are taxed where economic activities generating the profits are performed and where value is created.” With this tax avoidance costing governments across the globe an estimated US$100-240 billion annually, it’s revenue worth chasing.

In 2017, however, the Group of 20 (G20) major economies sought a report from the OECD on how little progress had been made on the challenge of collecting tax from the digital economy. This was less about tax avoidance (the main focus of the BEPS program) and more about how to allocate taxing rights in a world where physical presence – the traditional cornerstone of the permanent establishment – had become less relevant.

Initially, this concern was focused narrowly on the GAFAs – Google, Apple, Facebook and Amazon – the large transnational technology companies that were easy to identify and made good political targets for local politicians.

But as Bradbury puts it: “It is almost impossible to separate the digital economy or ‘tech firms’ from the rest of the economy because all firms to some extent are becoming more and more digitalised.

“So this has really expanded from being a debate about a handful of tech companies to being about the impact of digitalisation on fundamental tax principles, such as how we carve up taxing rights amongst the countries across the global economy more broadly.”

“This has really expanded from being a debate about a handful of tech companies to being about the impact of digitalisation on fundamental tax principles.”

Now 133 tax jurisdictions are working via the tax team at the OECD to deliver a consensus reform package to the G20 ministers next year. Those reforms will be built on two pillars. The first is some form of reallocation of taxing rights to deal with the seamless digital business world, and the second is an extension of the BEPS program to come up with a minimum corporate tax.

Reports from recent G20 and G7 meetings suggest there is some agreement on the minimum tax idea, but growing tensions over how to carve up the digital business tax base. Bradbury says that while it would be technically possible to reach an agreement on one of the pillars alone, that is unlikely given that many countries see the two pillars as being interdependent.

“A number of countries have a very strong view that both pillars are necessary and there should be a more integrated approach. It is too early to know, but the Inclusive Framework is certainly exploring both pillars and how they would operate in conjunction with each other,” he says.

A truly international effort

The G20 ministers have commissioned an independent economic analysis from the OECD on how the reallocation of taxing rights in a digital economy might affect the revenue outlook for various countries. Some of the findings from this study are likely to be part of Bradbury’s address at CA ANZ’s upcoming New Zealand Tax Conference in Auckland.

Last year, Bradbury’s work on digital tax at the OECD saw him and colleague Giorgia Maffini declared the most influential tax officials in the world by International Tax Review. Reappointed to his OECD job in April this year, Bradbury says it’s a privilege to be at the centre of a reform that could ultimately bring governments the crucial revenue they need to deliver better services to their citizens.

Indeed, the international effort to reform the global tax system is actually a little-appreciated case study in successful multilateralism, at a time when this sort of cooperation is under severe pressure elsewhere.

“This has been a really strong success story in terms of international engagement on international tax matters,” Bradbury says. “A lot has been achieved but we are not popping open champagne bottles at the moment.”

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Reported tax revenue increases from Tax Inspectors Without Borders audit assistance

EASTERN EUROPE
US$1.5 million

ASIA
US$57.4 million

LATIN AMERICA AND CARIBBEAN
US$110.8 million

AFRICA
US$300.7 million

Tax Inspectors Without Borders is a joint initiative of the OECD and the UN Development Programme to assist nations to implement BEPS solutions.

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