The most significant changes to global tax rules in a century will take longer than planned, negotiators said Monday, as they struggle to reach a formal agreement on how countries with large consumer markets could collect more corporate tax revenue.
The new rules, initially promised by mid-2022 as part of a multilateral deal negotiated under the auspices of the Organization for Economic Cooperation and Development, won’t be completed until next year. After that, countries will need to vote to approve them. The delay increases the risk that some governments will lose patience with the process and press ahead with their own national taxes on the big U.S.-based technology companies that are the prime targets of the effort.
The slower timeline adds to the political uncertainty in the U.S. For the global deal to take effect, U.S. lawmakers would need to approve any agreement reached by the Biden administration, but Congress might be under full or partial Republican control in 2023.
Nearly 140 nations agreed last year to an overhaul of the rules governing the taxation of profits made by companies that operate in more than one country. The overhaul is intended to allow governments to tax digital businesses that profit off consumers around the world but aren’t physically present there to sell their services, in contrast to manufacturing or retail businesses, for example. That economic shift—and the corresponding loss of corporate tax revenue—has caused frustration in national capitals, particularly in Europe.
The proposal, known as Pillar One, is intended to transfer some tax revenue to countries where customers live and away from where the taxed business is based or locates its intellectual property.
Negotiators in the group of countries that signed up in October had hoped to finalize the rules for the Pillar One shifts in tax revenues this month but have now given themselves an additional year.
In a report to finance ministers from the Group of 20 leading economies Monday,
the OECD’s secretary-general, described the first half of 2023 as a hard deadline. G-20 finance ministers are meeting in Bali on Friday and Saturday.
The OECD has coordinated work on the new rules since they were proposed several years ago. Securing the October 2021 agreement to overhaul the tax rules took years of negotiations that often seemed close to collapse. During the final years of the Trump presidency, a number of European countries, frustrated with what they saw as slow progress, introduced national digital-services taxes that targeted the big technology companies. In response, the U.S. threatened tariffs on imports from Europe on the grounds that most of those companies were American and that the taxes were discriminatory. A trans-Atlantic trade war seemed likely.
Negotiations gained new momentum with the election of President
and the engagement of Treasury Secretary
The Biden administration has been focused on Pillar Two, the minimum tax that would generate revenue for the U.S. But the two pillars are politically linked, and the U.S. has expressed its support for both.
Neither the U.S. nor the EU has passed legislation to implement the minimum tax. The U.S. effort is wrapped inside stalled Democratic fiscal legislation. The EU’s effort to implement the new tax by the start of 2024 has been stopped by Hungary’s veto. The U.S. Treasury said Friday that it is moving to terminate its tax treaty with Hungary.
Three key Republican lawmakers said Monday that Treasury talks about multilateral cooperation on taxes but in this case the administration made “a transparent attempt to bully Hungary into hasty action on a global minimum tax.” The comments from Sen.
(R., Idaho), Sen. James Risch (R., Idaho) and Rep.
(R., Texas) demonstrate the challenge of getting any part of the Biden international tax agenda through Congress.
The OECD said the delay in rewriting corporate tax rules was caused by the unanticipated difficulties of coming up with an entirely new way of assessing tax liabilities and moving away from century-old principles.
“Pillar One is revolutionary in its concept and ongoing negotiations remain justifiably intense to turn the deal reached last October into practice,” Mr. Cormann wrote.
But Mr. Cormann acknowledged that the delay will come as a disappointment to governments that have long sought changes to the rules.
“It is important to balance the political interest in swift implementation with the need to properly finalize the design of innovative new rules intended to last for decades,” he wrote.
Under the new rules, the U.S. would lose revenue it might otherwise collect from tech companies that would pay in Europe instead. But the U.S. could collect more taxes from foreign-based companies that sell to U.S. consumers and from U.S.-based pharmaceutical companies that book their profits from U.S. sales in foreign jurisdictions.
Beyond Mr. Cormann’s notice of the delay, Monday’s report includes proposed technical details of the Pillar One tax agreement. A U.S. Treasury official cautioned that those reflect the current state of talks, not anything that the U.S. or other countries have formally agreed to other than the delayed timeline. The aim of publishing the details is to solicit responses from companies and legislators in the coming months, the official said.
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The House and Senate will need to approve legislative changes, and that could require bipartisan cooperation. Republicans have argued that they haven’t been consulted enough during the talks and don’t have any data to back up the administration’s assertion that the deal is likely to be roughly revenue-neutral for the U.S.
In the Pillar One talks, the Treasury official said, the U.S. has been insisting on a method for reallocating profits across borders that would put the first obligation to give up revenue on those countries where companies have high profits relative to their assets and employees. And it has been trying to prevent profits from being reallocated twice.
The U.S. is generally satisfied with the state of the rules that provide exceptions for financial services and extractive industries, the official said.
Negotiators fear the consequences of missing the new 2023 deadline. If talks stall again or it becomes clear that Congress won’t approve an international agreement, the result could be a global free-for-all, in which some governments impose novel, uncoordinated taxes and others respond with trade sanctions.
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