Global Taxation Nears Historic Deal Amid Last-Minute Hurdles
The Biden administration and global allies scored a major victory Thursday in their push for a more balanced international corporate tax system, but still face multiple significant obstacles to completing an ambitious plan that has been years in the making.
Even as governments hailed the news -- U.S. Treasury Secretary Janet Yellen called it “an historic day for economic diplomacy” -- the agreement remains well short of a done deal. A handful of countries refused to sign on. Most importantly, resistance came from three European Union members, any of which could prevent the 27-member bloc from implementing the plan.
The U.S. Congress could also prove a major obstacle, since the legislature’s approval would be required to formalize Washington’s participation in the system, and President Joe Biden’s Democratic party holds razor-thin majorities that are at risk in next year’s midterm elections.
“This will level the playing field and make America more competitive,” Biden said in a statement, calling on Congress to pass his tax proposals. Multinational companies “will no longer be able to avoid paying their fair share by hiding profits generated in the United States, or any other country, in lower-tax jurisdictions,” he said.
Thursday’s deal leaves several details in the proposals unresolved, including important questions over how and when some countries’ unilateral taxes on tech firms’ revenue will be rolled back.
All that casts next week’s meeting of Group of 20 finance ministers in Venice in a new light, freeing officials to focus more on topics such as containing the Covid-19 pandemic rather than struggling to reach a deal on taxes. It could also represent a chance for senior officials to get on immediately with unfinished tax business.
“This will be the kickoff to the last stretch” leading up to the G-20 leaders’ meeting scheduled for Oct. 30-31 in Rome, said Lilian Faulhaber, a law professor at Georgetown University who specializes in international tax issues. “Venice gives them an opportunity to see exactly where are the areas of work that remain.”
The overhaul is aimed at helping countries share the spoils from multinational firms like Facebook Inc. and Alphabet Inc.’s Google, with implementation targeted for 2023.
The rules would curtail tax avoidance by making global enterprises pay an effective rate of “at least 15%.” They could also give some smaller countries room to collect more from foreign firms by taxing business activity within their borders, though other small nations could see tax revenue fall.
Several key countries that had been question marks agreed to the terms, including India, China and Turkey, according to the OECD. In fact, Argentina and Turkey came on board at the last moment, according to officials familiar with the negotiations, and the technical details may leave room for further concessions to developing economies.
Japan’s finance minister acknowledged there were some countries in disagreement, but he said there was still time to bring them on board and their opposition wouldn’t necessarily derail the path toward a final deal.
“We’re going to carefully work to convince the remaining nine countries to join us for a final agreement of all nations by October,” Taro Aso said Friday.
India’s finance ministry on Friday flagged that “significant issues” still need to be addressed about the tax rules, adding that it expects a consensus agreement by October.
China’s Foreign Ministry spokesman Wang Wenbin sidestepped several questions seeking clarification on the government’s position on the tax agreement during a regular press briefing in Beijing Friday.
“China is willing to uphold multilateralism with all countries and inject new impetus into the global economic recovery,” he said. “We hope we can better accommodate the interests of developing countries and properly handle the concerns of all relevant parties.”
Most of the remaining holdouts can effectively be ignored without endangering the deal -- except for EU members, because implementing the new rules there would require an EU directive, a legal act that must be approved unanimously by all 27 members.
That means Ireland and Hungary, which refused to back the plan, could effectively veto adoption in the EU, or at least force the bloc to resort to exceptional and untried legal measures for implementation.
Hungarian Finance Minister Mihaly Varga said in a statement on Friday that the 15% rate is too high, but that his government would continue “constructive” talks.
Read More: Global Tax Deal or Not, EU Faces Obstacles to Implementation
A senior U.S. Treasury official acknowledged this represents a serious potential hurdle. Ultimately, the official said, for the new agreement to work, EU countries will need to be on board.
Ireland’s finance minister, Paschal Donohoe, said Thursday that the nation isn’t yet ready to agree to a global minimum tax rate of at least 15%, though he intends to hold a public consultation in the country on the draft agreement, and the government pledged to “constructively engage” in the tax discussions.
French Finance Minister Bruno Le Maire said he would spend the coming week before the G-20 meeting redoubling his efforts to convince reluctant European countries to “make the necessary efforts to join an historic agreement that very broadly brings together the states of the planet.”
Europe isn’t the only source of uncertainty. Congress will have to approve any legal changes necessary for the U.S. to comply with the agreement, and it appears clear that Republicans are opposed.
Kevin Brady of Texas, the senior Republican on the House Ways and Means Committee, issued a statement calling the OECD agreement a “dangerous economic surrender.”
The peril on Capitol Hill is not lost on European leaders. Germany’s finance minister and deputy chancellor, Olaf Scholz, who is in Washington this week to meet with Yellen, made time on Thursday to see Richard Neal, the Democrat who chairs the Ways and Means Committee -- the key panel for advancing tax legislation.
Neal and his Senate counterpart, Finance Committee Chairman Ron Wyden, issued a statement applauding the reaching of the OECD accord, and said they look forward to reviewing its impact on the U.S.
Resolving the broad international issue has become increasingly urgent for the world economy after disagreements over taxing tech firms and setting a minimum rate spiraled into trade tensions last year. The promise of nearly $150 billion in extra revenue for governments also helped get a deal over the line as most countries face massive budget shortfalls in the wake of the Covid-19 pandemic.
The deal resolves another issue by ensuring that Amazon.com Inc. will be subject to tax in local jurisdictions, Le Maire said, even as the company posts profit margins below 10%. That means the online retail giant’s more-profitable cloud services business would be subject to the new rules under what the OECD is calling “segmentation” that may be applied in “exceptional circumstances” when company units meet the revenue and profit thresholds.
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