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LUXEMBOURG – An agreement on the overhaul of global taxation is almost completed. Now comes the hard part: making it work.
Negotiators from more than 130 countries will meet on Friday to work out the final details of a multi-year campaign to force the world’s biggest companies to pour more into national coffers. Ireland – one of the last to resist getting a deal – is set to back proposals that would fundamentally change the way companies like Apple and Johnson & Johnson pay taxes around the world.
Yet, among officials, attention has already been drawn to the next step in the implementation of the complex arrangement. Countries like France and the United States have yet to determine which governments can tax corporate giants, as policymakers around the world desperately seek additional income to help their economies recover from the pandemic.
Ongoing talks, facilitated by the Organization for Economic Co-operation and Development, have yet to determine the details of how the next global tax plan will work, with several officials already targeting 2023 as the year the new system takes full effect.
Several political obstacles, however, arise between now and then.
The ongoing divisions within Washington over the domestic corporate tax revisions outlined by US President Joe Biden that are at the heart of the global deal could still derail US participation. European countries like Italy and the UK are to cancel their own national digital taxes, which primarily targeted Silicon Valley businesses.
And policymakers have yet to draft complicated international agreements to override countries’ existing tax laws – negotiations expected to last until 2022. Senior politicians acknowledge these difficulties, but expect to address these details afterwards. reaching a deal later this week.
“A final agreement on international taxation for the 21st century is within reach and it is now or never,” Bruno Le Maire, French finance minister, told reporters on Tuesday. “Either we reach an agreement in the next few days or it will be very difficult to recreate the momentum necessary to reach a final agreement.”
The anatomy of a global agreement
That a global tax deal is nearing completion should not be underestimated.
For years, countries have fought for the right to tax giants like Facebook and Google, many of which have extensive operations in jurisdictions where they have little or no physical presence. This is one of the reasons why many international companies often benefit from low or negligible effective tax rates.
As part of the OECD-led process, negotiators attempted to address this issue by giving national governments the right to pocket a portion of these profits, based on a complex formula that allocates that money according to where businesses operate. They also lobbied to create a minimum corporate tax rate to prevent multinational companies from using tax havens to lower their overall tax bill.
These talks have dragged on for years and face political headwinds, especially under the administration of former US President Donald Trump, who tried to make the tax overhaul purely voluntary for businesses.
That all changed when the Biden administration offered a compromise this spring, as it crafted a broader strategy of tax hikes to fund its national priorities. And now, a final deal, to be announced on Friday, is expected to include two major changes to the global tax system.
First, the 100 largest companies in the world will have to pay taxes in all jurisdictions in which they operate. These payments will be based on a complex formula that officials are still finalizing. But it will likely target profits above the 10% threshold for companies with annual sales of $ 20 billion or more. Of that taxable profit, these companies are expected to distribute 25% of these funds globally for countries to tax under the new formula.
Second, more than 130 countries are also expected to accept a 15% corporate minimum rate. That figure had led to internal political struggles after Ireland, which has a domestic corporate tax rate of 12.5%, and a few other countries refused to sign the deal. But after intense lobbying, especially from Washington, Dublin is now expected to sign the international agreement.
Dublin’s green light comes with conditions: it called for the words “at least” to be removed from the 15% threshold. It also wants to continue to be allowed to offer its low corporate tax regime to small businesses that do not fall under the OECD-led tax deal, according to three EU officials who spoke to POLITICO.
“The discussion in the inclusive framework is progressing and I strongly support the possibility of having a comprehensive agreement on this at the G20, either in Washington or at the G20 leaders’ meeting at the end of the month in Rome,” said Paolo Gentiloni, the economic chief of the European Commission, told reporters, referring to the OECD talks.
“We had three EU member states that did not participate in this agreement [in July]”, he added, referring to Ireland, Estonia and Hungary.” I think there is an ongoing development that these Member States need to talk about. “
Now the hard part
Yet the tough negotiations on how this global deal should work have yet to begin.
Four EU officials told POLITICO, on condition of anonymity, that they expected details of a global minimum corporate tax rate to be released by the end of October. The Commission also plans to draft its own version of the 15% tax rate by the end of the year so that the 27 countries can start making the necessary national changes sometime in 2022.
The global tax on the world’s 100 largest companies will require all participating countries to sign an international agreement to ensure that profits can be distributed around the world without legal conflicts. The OECD hopes to have this agreement signed before July 2022.
Such a swift timeline, however, could be tricky in the United States, where Congress is still fighting for a massive social policy bill that includes updates to the country’s national tax rules to comply with the global deal. . Politicians are fighting over the intricacies, including the so-called Global Intangible Low-Taxed Income, or GILTI, which allows the federal government to tax corporate profits held abroad. Some policymakers fear that changes to this rate will take it above the global rate of 15% – and in turn make the United States uncompetitive against other countries.
Domestic politics, including persistent partisan differences over how these global tax rules should be reorganized, could also make it difficult for Congress to pass parts of the comprehensive deal.
While U.S. Treasury Secretary Janet Yellen has said Congress could pass the provisions related to a global minimum corporate tax rate without the backing of Republicans, efforts to determine which other governments can tax the largest companies around the world will likely require bipartisan approval from the US Senate.
Republican lawmakers have previously suggested they will not back a deal.
“I think it is unlikely,” Republican Senator Patrick Toomey said at a recent Banking Committee hearing in reference to the need for a so-called qualified two-thirds majority in this chamber to vote in favor. of a global tax agreement. “Amending these treaties requires ratification in the Senate. I see no way around that.”
Ongoing disputes over how countries can tax giant companies also need to be overcome before the proposed tax overhaul can take effect.
Washington wants countries with national digital taxes to reverse these levies as part of the upcoming deal, though EU officials have stressed they will only do so once a final deal – encompassing both parts of the OECD proposals – will become law, mainly as by 2023 at the earliest.
While these digital levies mainly target large tech companies like Apple and Google, small US tech companies have also been caught in these legislative nets, and US policymakers believe these companies should be excluded from the scope of unilateral measures by the US. country. EU officials recognize that their national taxes will eventually be abolished, but governments have yet to agree on how to divide tax revenues under the new system.
“The block is on the amount of surplus profit reallocation,” Le Maire said in reference to how countries will distribute corporate income. “What is the share of the pie that the states will be able to share?
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