The world could see a major overhaul of global tax rules by the end of 2020, upending how multinational companies have been taxed for decades.
But first the Organization for Economic Cooperation and Development-led effort needs to make it through the first half of the year.
The OECD will try to get nearly 140 countries at meetings in January and again midyear to agree broadly to its plan to address concerns that multinational companies—especially tech giants—aren’t paying enough in taxes or in the right countries.
Reaching agreement on the “architecture” of the plan by July means the OECD can continue developing technical details through the rest of the year, said Pascal Saint-Amans, director of the OECD’s Center for Tax Policy and Administration. The organization is working against a deadline, set by the Group of 20, to have a solution by the end of 2020.
If countries aren’t ready to come to agreement yet, “the alternative is bleak,” Saint-Amans said Dec. 19.
Failure to negotiate a deal could threaten to stall the effort and encourage more countries to pursue unilateral tax measures aimed at the digital revenue of companies like Facebook Inc. and Amazon.com Inc.
“Obviously, the next six months will be crunch time,” said Will Morris, deputy global tax policy leader at PwC and chairman of the tax committee at Business at the OECD, an advisory group.
The plan, divided into two “pillars,” would give more taxing rights to the countries where multinationals have customers, replace some current tax rules with simpler formulas, and create a global minimum tax rate and anti-abuse rules.
To get to yes, the OECD will have to address some key concerns, including uncertainties over a proposal to make the plan optional, the structure of the minimum tax, and dispute resolutions with tax authorities.
“It’s one of those things where you answer one question, and that raises five more questions,” Morris said. “You are essentially trying to change a significant part of the international tax rules which have been around for quite a long time, in a short period of time. In a sense, why would that not be hard?”
The U.S.—home to many of the tech companies that are hit by unilateral digital taxes—has said it is eager to reach a global solution. But in a letter released in early December, Treasury Secretary Steven Mnuchin suggested making Pillar One, the profit reallocation proposal, an optional safe harbor.
The U.S. proposal would let a company choose either to be taxed under the new rules or potentially face unilateral measures like France’s 3% tax on digital revenue, Lafayette “Chip” Harter, deputy assistant secretary for international tax affairs at the Treasury Department, told Bloomberg Tax Dec. 9.
The suggestion could make it much harder for countries to reach consensus, the OECD warned in a reply. French Finance Minister Bruno Le Maire Dec. 6 called the suggestion unacceptable and said a global solution must be binding.
The U.S. will make a decision on whether it wants Pillar One to apply on a mandatory or safe harbor basis once the pillar’s design becomes clearer, Harter said Dec. 19. The U.S. will continue working toward a cooperative solution at least through the January meeting, he said.
“Everyone is engaged, I think, including the U.S.” Saint-Amans said. “Some countries questioned that. The answer is yes, the U.S. is engaged.”
Minimum Tax Design
Countries need answers to several key design questions on the second pillar of the OECD plan, which would ensure companies pay at least a minimum rate of tax on their global profits.
Many U.S.-based companies are pushing for the minimum rate to apply to a company’s effective global tax rate—blending the rates the company pays in all the jurisdictions where it pays tax. That approach would align with rules enacted in the 2017 U.S. tax overhaul, a position Mnuchin supported in his letter.
But other countries want companies to meet the minimum tax rate wherever they operate.
The OECD must also decide the order in which different Pillar Two rules apply, said Barbara Angus, global tax policy leader at Ernst & Young LLP. That order could determine which country benefits from the additional tax companies pay to reach the minimum rate.
Finally, countries have yet to decide on the minimum rate itself. U.S. rules enacted in the 2017 tax overhaul are designed to apply a minimum rate of tax to companies paying less than 13.125% on their global profits. French Finance Minister Bruno Le Maire called for a 12.5% minimum tax rate in early December, which would match the corporate income tax rate in Ireland, one of Europe’s lowest.
Recent public consultations on the two pillars have highlighted the tug-of-war between stakeholders. For example, advocacy groups and developing countries are calling for stricter rules, while businesses are asking that the plan be scaled back.
A litany of businesses and industry groups have asked for the Pillar One rules to include carve-outs for their sectors. They’re concerned that novel rules and paying tax in more places could lead to more taxes, new compliance burdens, and more disputes with revenue authorities.
While Mnuchin’s letter raised worries about departing from decades of norms, tax advocacy groups representing developing countries have been pushing for an even more formulaic approach—for example, applying new methods to allocate all corporate profits, not just the above-normal or “non-routine” returns the current plan targets, as a group of developing countries led by India had earlier proposed.
Many companies also worry that new rules will bring more disputes with tax authorities that will drag on indefinitely without some guarantee that they’ll be resolved. For example, companies would like mandatory binding arbitration included in new rules. The mechanism is used in some bilateral tax treaties and locks countries into arbitrators’ judgments in tax fights over multinationals’ profits.
But developing countries oppose mandatory binding arbitration because they worry that being forced into a type of dispute resolution they cannot escape from infringes on their sovereignty, Thulani Shongwe, an economist in the secretariat of the African Tax Administration Forum, said Nov. 21 at an OECD consultation.
The OECD is trying to build guaranteed dispute resolution into the rules, an official said Nov. 22.