Meeting in Paris on Monday and Tuesday, tax authorities from 143 jurisdictions were expected to seal an agreement on a new way of dividing taxes imposed on the profits of some 100 of the world’s biggest companies. Such a deal – part of a series of changes to how, where and how much multinationals are taxed around the world – would reallocate taxation of around $200 billion in corporate profits worldwide.
The global initiative aims to let countries capture tax revenue from the large companies at the heart of the information-based economy. Currently, those companies can operate worldwide, concentrating their profits in their home countries or smaller, low-tax jurisdictions; Then they pay relatively less tax in more populous countries where they have many users.
Failure to reach an agreement can have far-reaching consequences. Several countries have threatened to impose special taxes on mainly US tech companies if the talks fail. Washington views those taxes as hostile and could retaliate with tariffs.
A year ago, the negotiators had given the first half of 2023 as a tough deadline.
Officials leading the talks said the objections of some countries are still hindering the agreement. But he said those concerns should be addressed in the coming weeks. This would pave the way for a treaty to be agreed upon by the end of this year. It then has to be signed and ratified by the participating countries.
“There is enormous convergence and agreement on key components,” said Manal Corwin, head of tax policy at the Organization for Economic Co-operation and Development, which has been leading efforts to reform the tax system for the past decade.
Failure to conclude a deal quickly could lead to a free-for-all arrangement in which governments around the world impose targeted charges on big technology companies – known as digital services taxes – that could potentially push the US into the US. Will prompt you to retaliate for unfair treatment. businesses.
Lily Batchelder, assistant US Treasury secretary for tax policy, said significant progress has been made in the talks.
“There are still important issues to resolve [this piece]that will protect American businesses against discriminatory digital services taxes and other unilateral measures,” she said.
Negotiations on how to split tax revenue are based on a 2021 agreement in which governments set a minimum tax rate on the profits of a large group of businesses that operate internationally. Those two parts of the negotiations are technically separate but linked politically.
The part of the agreement under discussion this week would mark the most sweeping change in a century to the rules that determine where profits can be taxed. It aims to replace thousands of treaties between nations that currently determine how much individual governments receive and prevent countries from imposing new taxes on companies.
Currently, 138 jurisdictions have supported it—Canada, Sri Lanka, Pakistan, Russia and Belarus oppose it. Canada is concerned about the lack of a firm deadline for implementation, according to an official familiar with the talks.
More problematically, legislators in the world’s largest economy – the US – are divided and wary, casting doubt on the likelihood of ratifying the treaty even if negotiations are successful.
The current rules were designed in an era when businesses needed a large physical presence in a country – such as a factory – in order to make a profit. In the digital age, physical proximity is not necessary to serve the customers of a country.
Governments started looking for ways to offset the decline in their tax revenues a decade ago. Europe, in particular, wanted to find ways to tax American tech giants that had a large presence in countries such as France and Germany but lower corporate income. Some have imposed their own tariffs on digital services to pressure the US into agreeing to sweeping rule changes.
In response, the US threatened to impose tariffs on European imports. The current talks represent a movement towards an agreement that would give countries with large customer bases a way to get more revenue – at the expense of smaller countries where many tech companies hold intellectual property.
Under the current framework, the moratorium on unilateral taxes would be extended until at least 2025 to give legislatures time to approve new rules. About 30 countries that host companies with 60% taxes will need to sign the convention by the end of this year for the expansion to take effect.
US lawmakers, especially Republicans, have criticized the Biden administration’s approach to negotiations. They say they were not included in the negotiations or given enough information about the potential impact on US businesses and revenues. US approval would be necessary for the global agreement to go ahead.
Treasury Secretary Janet Yellen has stated that the reallocation of tax powers would have minimal impact on overall US tax collections. Tech companies will likely give less money to the US and more money to foreign governments. But pharmaceutical companies, which often book their profits from US sales in Ireland and Puerto Rico, are likely to pay more to the US under the deal.