OECD tax plan targeting conflict-ridden multinationals

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The world’s biggest economies are attempting to save a landmark OECD tax deal this week after implementation difficulties threaten to pressure multinationals to pay more tax in the countries where they operate. .

Representatives from more than 130 countries have gathered at the OECD’s Paris headquarters for three days of talks on implementing a key part of the unprecedented tax accord, which has been beset by ratification delays and problems.

On the agenda is a change in global law that would allow countries to eliminate the current patchwork of national tariffs on tech giants such as Google, Facebook and Amazon.

Officials also hope that a ban on the so-called “digital services tax”, which is due to expire in early 2024, could be extended until there is a consensus on a global reform. Without expansion, a trade war is likely to begin as the countries go it alone in their efforts to extract more revenue from the world’s 100 biggest multinationals that are covered by the pact.

Negotiators hope to delay the ban until 2025 because they fear some countries will have difficulty ratifying the agreement. These include the US, where many of the world’s largest tech companies are headquartered.

A person familiar with the talks said the “big political issue in the room” was whether the US would be able to get Congressional approval of any deal agreed upon in the OECD.

While the Biden administration supports the OECD deal, which was tentatively agreed upon in the autumn of 2021, tax treaty changes require a two-thirds majority in the Senate to approve. Biden’s Democrats outnumber rival Republicans in the Senate, many of whom have strongly opposed the deal.

Meanwhile, some emerging markets fear a global solution to taxing Big Tech — known as “Pillar One” in global tax circles — will reduce their revenues. “It is going to be very difficult for India in particular,” said a person close to the talks.

The changes are designed to update international rules so that the world’s largest 100 companies pay more tax wherever they do business.

Currently, finance ministries can tax a company’s income only if it is physically present in their country – an approach that is no longer fit for purpose in the age of digitisation.

The new system would instead require multinational companies to pay taxes based on the place of sales – a change the OECD has estimated would result in a change where around $200 billion of profits would be taxed.

Specifically, the changes will apply to multinationals with revenues of more than €20bn and profit margins above 10 per cent. For those companies, 25 percent of profits above the 10 percent margin would be taxed in the countries where they are sold.

Objections from India and other emerging markets center on this formula, arguing that it will benefit developed countries, simply because the largest multinational companies sell more in richer economies. There is also a digital service tax in India that will have to be waived upon signing the agreement.

Developing countries’ unhappiness with the way negotiations have panned out has led some to ignore a ban on digital services taxes and introduce their own measures to tax the tech giants.

Sri Lanka originally participated in the OECD negotiations but decided not to support the political agreement in 2021. Now grappling with a severe economic crisis, the government has sought a $3 billion bailout package from the IMF and is considering imposing a digital service tax on e-businesses.

Yet two sources told the Financial Times that the country is coming under pressure from the IMF to abandon the plan and sign up to the OECD deal. A Sri Lankan government official said, the IMF’s position is that “this new tax will deter foreign direct investment in Sri Lanka”. IMF officials on Thursday denied putting pressure on Colombo over its tax plans.

“Revenue mobilization is a key pillar of the IMF program with Sri Lanka,” the fund said. “The IMF will work with the authorities to bring about reforms in the best interest of Sri Lanka and its people.”

“Unilateral measures are not the best solution, the optimal solution is certainly cooperation. , , But the most realistic solution for developing countries now is to take unilateral measures,” said Veronica Grondona, former head of international tax at Argentina’s tax authority, who was involved in the talks until January.

Businesses that are finding it difficult to comply with the current patchwork arrangement are nervous about the prospect of deals falling apart.

The International Chamber of Commerce warned last month that the importance of “a stable and predictable tax system” for companies “cannot be overstated”. A letter to the OECD secretariat last month said only an approved, widely implemented global treaty could “achieve this goal”.

The talks will end on July 12. Negotiators aim to publish an agreed text on the global rule change, which they see as an important step toward moving forward with a signing ceremony later this year. Countries are then expected to ratify it in their legislatures.

However, even if a tentative agreement is reached in Paris this week, a person familiar with the talks said it was “unclear” whether a “significant group” of signatories would be in place by the end of 2023.

Additional reporting by Mahendra Ratnaweera in Sri Lanka

The story was updated on 13 July to reflect the IMF’s position on Sri Lanka’s tax reforms