It took eight years and eight months of intense negotiations for 137 countries to agree on the global tax treaty they signed in October. Defined as the most important international tax reform of a century, now comes the difficult part – its implementation.
If that happens, governments around the world will earn an extra $ 150 billion a year in corporate tax revenue. Although multinational companies will pay more, they will have a level playing field – to ensure that their competitors can not pay less than they do. And some of the public outrage raised by the use of tax havens by multinational corporations after the 2008 financial crisis will be alleviated.
“The international tax system is in dire need of reform,” said Janine Juggins, executive vice president of global taxation and treasury at Unilever. “It’s in everyone’s best interest to move to a more stable system,” she told the FT Global Board of Directors Conference in December.
But turning the political agreement into legally binding commitments can be a long and hard blow. And ironically, the US, a main instigator of the agreement, could actually kill it because of the polarized policies that so often block domestic law.
“Everyone knows that nothing has been signed yet,” said Alex Cobham, chief executive of the Tax Justice Network press group.
Countries must legislate to implement the global minimum corporate tax rate of 15 percent – known as ‘Pillar Two’ of the global tax treaty – by the end of 2022, to implement it from 2023 onwards.
The global minimum rate will be the “easy” part, said Reuven Avi-Yonah, a law professor at the University of Michigan. “It does not require change in the tax treaties,” he said. “You really just need the agreement of the big economies, where most of the multinational companies are based, to make that happen.”
It is encouraging that Ireland and Cyprus have already announced increases in their corporate tax rates from 12.5 to 15 per cent. The EU also has published a directive with its 27 member states that must now introduce legislation to implement it.
The much harder part of the tax deal is about getting the world’s largest multinationals to pay more taxes where they actually do their sales, rather than where they have a physical presence. This is necessary to avoid the threat of trade wars driven by tax policies such as taxes on digital services.
The issue focuses on US technology companies such as Amazon, Google, Apple and Facebook. Google UK, for example, paid £ 50 million in corporate tax last year despite its UK subsidiary generating revenue of £ 1.8 billion. This is because Google UK is mainly used as the marketing and sales department of its European company, which is headquartered in Ireland, where taxes are lower.
The challenge is that getting countries to agree to this reallocation of tax rights, known as ‘Pillar One’ of the agreement, requires a series of simultaneous changes to global tax laws.
One way to achieve this would be for all 137 signatory countries to the tax treaty to amend their network of bilateral tax treaties – but it’s very time consuming. A faster way, recommended by the OECD, is to introduce a legally binding multilateral convention that countries sign and then ratify at home.
Countries are working at the OECD in Paris to draft such a convention. The goal is to reach an agreement on implementation by about April; each country will then have to ratify the convention in time in its own legislature so that the rules can come into force in 2023.
But such international treaties are usually a curse for the United States – and Republican senators are opposed to them.
The Biden administration believes that this can be done through a congressional agreement or other means that will be approved by a simple majority of the Senate by the casting vote of the vice president, rather than the two-thirds majority required for ratification of treaties . But the jury is out on whether it can really work.
Dan Neidle, a UK-based tax partner at Clifford Chance, a law firm, warned that attempts to circumvent the problem by entering into an arrangement that was not a treaty as such could be subject to legal challenges in the US and elsewhere.
“Everyone knows this [implementation] is a question, ”said Pascal Saint-Amans, Head of Tax Administration at the OECD. “But the job assumption is, and we have extremely strong signals from the US administration. . . it will happen. ”
Others are more skeptical. “My own view is no way Pillar One can be implemented in the US,” Avi-Yonah said. Any “solutions” the administration seeks to circumvent the Senate bill will be “new,” added Mindy Herzfeld, a professor of tax practice at the University of Florida Levin College of Law.
Meanwhile, even the ability of the US to pass the easier global minimum tax reform seems questionable. Draft legislation on the reforms is included in the Biden administration’s $ 1.75tn Build Back Better Infrastructure Account, but it is struggling to get through Congress.
Failure by the U.S. or another major economy to ratify this part of the agreement could derail the entire project, some stakeholders have warned.
“We want the whole world to enter into this agreement, so we need ratification in all the countries,” said Pierre Gramegna, Luxembourg’s finance minister. “Political risk is like a big economy like the United States or China [or] countries like that. . . download. “
If that happens, developing countries that complain that the agreement will bring them little tax revenue may refuse to implement the rest.
There could also be a trans-Atlantic tax war as European countries such as France, Austria, Italy, Spain and the UK reintroduce digital services taxes on major US technology companies they once had agreed to drop in exchange for the implementation of the global agreement.
“It would be wrong to assume that this problem is not going to happen,” Neidle said.
The OECD wants the entire agreement in place by 2023. But previous reforms to the international tax system have taken countries an average of two years to implement – with some taking as long as seven years.
“This one is harder and more complex,” Neidle said. “Why is it going to be faster?”