Deal on global tax

An agreement to overhaul the global tax system is almost done. Now comes the hard part: making it work.

Negotiators from more than 130 countries will meet Friday to hammer out the final details of a years-long push to force the world’s largest companies to pay more into national coffers. Ireland — one of the last holdouts on securing an agreement — is on the brink of backing proposals that would fundamentally alter how companies like Apple and Johnson & Johnson pay tax worldwide.

Yet among officials, attention has already shifted to the next stage of implementing the complex arrangement. Countries like France and the United States must still hash out which governments can tax corporate giants, while policymakers everywhere are desperate for additional revenue for their economies to recover from the pandemic.

The ongoing talks, facilitated by the Organization for Economic Cooperation and Development, still need to figure out the details of how the upcoming global tax plan will work, with several officials already targeting 2023 as the year the new system will come into full force.

Several political hurdles, though, stand between now and that deadline.

Ongoing divisions within Washington over domestic corporate tax overhauls outlined by U.S. President Joe Biden that are central to the global deal could still scupper American involvement. European countries like Italy and the United Kingdom have to roll back their own domestic digital taxes, which have primarily targeted Silicon Valley companies.

And policymakers must still draft complicated international agreements to override countries’ existing tax law — negotiations that are likely to drag on well into 2022.

“A final agreement on international taxation for the 21st century is within reach and it is now or never,” Bruno Le Maire, France’s finance minister, told reporters. “Either we reach an agreement in the next few days, or it will be very difficult to re-create the momentum to reach a final agreement.”

That a global tax agreement is almost done should not be understated.

For years, countries have jockeyed for the right to tax giants like Facebook and Google, many of which have extensive operations in jurisdictions where they have little, if any, physical presence. This is one reason why many international firms often enjoy low or negligible effective tax rates.

Under the OECD-led process, negotiators have tried to fix that by providing national governments the right to pocket some of that profit, based on a complex formula that divvies up that cash depending on where companies operate. They also have pushed to create a minimum corporate tax rate to stop multinational firms from using tax havens to reduce their overall global tax bill.

These talks have dragged on for years — and run into political headwinds, particularly under the administration of former U.S. President Donald Trump, who tried to make the tax overhaul merely voluntary for companies.

That all changed when the Biden administration offered a compromise this spring, as it crafted a broader strategy of tax hikes to fund its domestic priorities. And now, a final agreement, to be announced is expected to include two major changes to the global tax regime.

First, the world’s 100 largest companies will have to pay tax in all jurisdictions where they have operations. Those payments will be based on a complex formula that officials are still finalizing. But it will likely target profits over the 10 percent threshold for companies with annual revenue of $20 billion or more. Of that taxable profit, those firms would have to distribute 25 percent of those funds globally for countries to tax under the new formula.

Second, more than 130 countries are also expected to agree to a minimum corporate rate of 15 per cent. That figure had led to political infighting after Ireland, whose domestic corporate tax rate is 12.5 per cent, and a few other countries refused to sign up to the agreement. But after heavy lobbying, particularly from Washington, Dublin is now expected to sign up to the international agreement.

Dublin’s green light has come with conditions: It has asked that the words “at least” are taken out of the 15 per c0ent threshold. It also wants to still be allowed to offer its low corporate tax regime to smaller companies that don’t fall into 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 to have a global agreement on this in the G20, either in Washington or in the G20 meeting of the leaders at the end of the month in Rome,” Paolo Gentiloni, the European Commission’s economic chief, told reporters, in reference to the OECD talks.

“We had three EU member states not participating to this agreement [in July],” he added, referring to Ireland, Estonia and Hungary. “I think there’s an evolution ongoing that this is up for those member states to talk about.”

Still, the difficult negotiating on how this global deal should work has yet to start.

Four EU officials told POLITICO, on the condition of anonymity, they expected details of a global minimum corporate tax rate would be unveiled by the end of October. The Commission also plans to draft its own version of the 15 percent tax rate by the end of the year so that all of the 27 countries can begin making the necessary domestic changes sometime in 2022.

The global levy on the world’s 100 biggest companies will need all participating countries to sign onto an international accord to ensure profits can be distributed across the world without legal clashes. The OECD hopes to have this accord signed before July 2022.

Such a swift timeline, though, could be tricky in the U.S., where Congress is still fighting over a massive social policy bill that include updates to the country’s domestic tax rules to comply with the global deal. Politicians are squabbling over the finer points, including the so-called Global Intangible Low-Taxed Income, or GILTI, which allows the federal government to tax corporate earnings held overseas. Some policymakers are concerned that changes to that rate could bring it above the 15 per cent global rate — and in turn make the U.S. uncompetitive compared to other countries.

Domestic politics, including ongoing partisan differences over how these global tax rules should be revamped, could also make it difficult for Congress to pass parts of the overall deal.

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