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Global tax deal expected by end of June

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Global tax deal expected by end of June

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An agreement to overhaul the global tax system — a major milestone after years of political wrangling — is expected to be announced as soon as the end of the month, according to four officials.

The announcement, which is still under negotiation and could slip into next month, would allow countries worldwide to tax the likes of Facebook and Amazon, while creating a global minimum tax rate to stop multinational firms from shifting profits to low-tax countries, according to officials who spoke on the condition of anonymity because they were not authorized to speak publicly about the ongoing talks.

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“It looks like we will come together at all these different meetings and then a new phase of taxation, globally, will take place and we will end the race to the bottom,” Olaf Scholz, Germany’s finance minister, told reporters Thursday without confirming a June agreement date. “We have worked so hard. We are now trying to get all the breakthroughs at the meeting of the G7 finance ministers.”

Some smaller countries, notably Ireland whose low corporate tax rate has enticed scores of multinational companies to set up shop locally, are still fighting to maintain their national levies in a last-ditch attempt to stop the global minimum corporate tax rate from undermining their ability to woo international firms. It is unclear if an agreement on that part of the deal can be hammered out amid ongoing political tension.

Still, there are several major sticking points that must be ironed out between now and June 30.

Questions remain about whether China, the world’s second-largest economy, will sign up to the deal, while several industries like the financial services sector are lobbying hard to be excluded from the potential agreement.

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Negotiators must also figure out how to untangle numerous domestic digital services taxes from France, the United Kingdom and others that would have to be rescinded for a revamp of the global tax system to be finally approved. Similarly, U.S. officials have voiced concerns about an upcoming digital levy to be proposed by the European Commission, though officials stressed that Brussels’ plans were unlikely to undo years of talks to reach agreement.

U.S. President Joe Biden’s administration had proposed shifting the focus of the global tax talks from solely on Big Tech firms to encompassing the world’s 100 largest companies, including many of Europe’s biggest names — a move that jumpstarted talks and led to the likely first major overhaul of the global tax system in decades. The officials cautioned that talks were still ongoing and that details of the final plan could still change between now and June 30.

G20 finance ministers meet on July 9-10 to approve any deal, and a PowerPoint presentation about the current proposals was shared with governments worldwide last week, with countries expected to give their feedback by June 18 ahead of any possible agreement, according to one of the officials who spoke to POLITICO. Two other officials said that technical details on the complex global pact would take further months to approve, and would likely be announced by October.

Under the current deal, which is part of negotiations between more than 130 countries overseen by the Organization for Economic Cooperation and Development, the world’s largest companies — everyone from Apple to Amazon and Total to Volkswagen — would have their global income taxed, beyond a certain threshold, in all countries where they had local operations.

The final global agreement is expected to mirror that of G7 finance ministers, who proposed that all countries have the right to tax at least 20 percent of a company’s profits earned within their borders, so long as a firm’s profit margin was above 10 percent.

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To ensure that companies like Amazon, whose overall profit margin is less than 10 percent, are included in the global agreement, negotiators will propose including parts of firms’ operations in the tax deal even if their overall business falls out of scope, according to two of the officials. That will allow the e-commerce giant’s cloud business, whose profit margins are roughly 30 percent, to be taxed wherever it has operations worldwide despite Amazon’s overall profit margin being too low for it to fall into the global tax revamp.

The compromise to include the U.S. tech company was viewed as non-negotiable by some European governments that said the e-commerce giant has disproportionately benefited from higher sales during the COVID-19 pandemic, but whose activities were still not taxed locally because the company’s main European operations were headquartered in Luxembourg, the two officials added.

“It’s a question of justice,” French Economy Minister Bruno Le Maire told reporters in Luxembourg on Thursday. “I remind you that the biggest winners of the economic crisis are the digital giants. And they’re the ones that pay the least in taxes. For the reasons of justice, that means that all the digital giants, without exception, Amazon included, understand that they pay their fair share in taxes.”

The second part of the upcoming agreement would set a minimum global corporate tax rate of likely 15 percent — a figure that will allow few so-called carve-outs for governments to offer tax breaks to companies to reduce their overall tax obligations.

That agreement, if confirmed, would be a blow for countries like Hungary and Ireland, which have pursued an industrial policy of enticing international companies to their shores via low corporate tax rates in the hope of offsetting that lost income through other levies like income tax and higher economic output. Other governments have criticized such practices for allowing some of the world’s largest companies to significantly reduce their tax obligations worldwide.

Ireland’s Deputy Prime Minister Leo Varadkar told reporters last week that Dublin would defend the country’s current 12.5 percent rate, and those close to the ongoing negotiations said jurisdictions with low tax rates were fighting to maintain the right to set their own national tax policies. U.S. Treasury Secretary Janet Yellen, though, told lawmakers Wednesday that all EU countries would agree to the upcoming deal, a potential ploy to strong-arm reticent EU governments to back the deal.

“I’ve had very constructive bilateral conversations with the Irish finance minister and believe that he’s going to be working with us to try to raise the global minimum tax even though that’s a highly consequential matter for Ireland,” she said. Le Maire said he would meet with his Irish counterpart to discuss how to overcome any issues related to reaching a global deal.

One reason for a potential agreement on a global minimum corporate tax rate, according to one of the officials, was a proposed change to the U.S. tax system, which would make it more difficult for companies to avoid paying tax by parking their income in low-tax jurisdictions.

The U.S. Congress imposed taxes on so-called global intangible low-taxed income, or GILTI, in 2017, which targeted companies’ patents and other intellectual property that could easily be moved to countries with low taxes.

Biden has proposed doubling the GILTI tax rate to 21 percent and requiring companies to calculate it based on their earnings in each country where they do business, rather than across a company’s entire foreign operations. That change could potentially nullify other countries’ ability to offer lower rates, as firms’ global income would be captured by the proposed overhaul in the U.S. tax system.

U.S. Republican politicians, however, have balked at those domestic changes because they believe it will hurt America’s economic competitiveness with foreign rivals.

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Author: Mark Scott, Bjarke Smith-Meyer, Toby Eckert and Giorgio Leali
This post originally appeared on Politics, Policy, Political News Top Stories

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Global tax deal expected by end of June
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