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The Latest News on the OECD’s Global Tax Reform

28th September 2021

Week of 8/19/21: Should European Telecoms be Excluded from the OECD’s Global Tax Reform? 

First, it was financial services and extractive businesses who wanted to be exempt from the OECD’s new global tax plan. Now, European Telecoms are calling for an exclusion, too. The OECD’s international tax reform, which after years of debate is inching closer to the finish line, contains two parts: Pillar One, a proposal that reallocates profits for a handful of extremely profitable businesses—78 at last count—and Pillar Two: a global minimum tax, which would allow host jurisdictions to top up taxes to the minimum rate if the country with taxing rights comes in under. But certain industries, like banking and mining, get a pass—and now European cellphone operators are lobbying for one, too. In August, the European Telecommunications Network Operators Association published a paper claiming that the new plan could put an extreme tax burden on the industry and an exclusion is warranted due to “pre-existing sector-specific taxes.” The group also pointed out that due to physical infrastructure and the fact that they don’t cater to foreign customers, they are already taxed where they have customers, which is sort of the point of the OECD’s global tax reform in the first place.  

Week of 9/7/21: What Will a Multilateral Instrument for Pillar 1 Entail? 

If you think coming up with a global tax plan that the world could agree on was hard, wait until you see what’s involved with executing it. Step One: Coming up with a multilateral instrument (MLI) that would 1.) reroute profits generated by multinational businesses 2.) override the relevant portions of bilateral treaties and 3.) be amendable enough to 134 jurisdictions. The MLI that implements Pillar 1 is slated to be one of the one of the most complex thanks to the need for including a profit allocation formula and a solution for countries to swiftly resolve multilateral disputes—critical ingredients that aren’t part of current treaties. The BEPS MLI in place is largely to prevent tax avoidance—and the clauses are optional. Meanwhile, a Pillar 1 MLI would reallocate revenue and essentially require certain countries to forgo tax dollars, a request that will no doubt be met with reluctance. Still, the only way Pillar 1 can work is if all countries adhere to the same formula in calculating and allocating Amount A. The OECD will finalize the new tax rules in October, and we hear a new MLI will be ready to sign in 2022. Whether there are enough takers, however, remains to be seen.   

Week of 9/7/21: Hungary Wants More Carveouts on Global Minimum Tax 

While more than 130 countries are in agreement regarding a global minimum tax of at least 15 percent, Hungary isn’t easily swayed. The country, which currently offers a 9% corporate income tax rate, fears that increasing the tax rate to at least 15% could reduce new investment and R&D activities. Another issue? Carveouts. State Secretary for Tax Affairs Norbert Izer recently said for Hungary to sign on, tangible investments, notably in factories and equipment, must be exempted from the minimum tax. Right now, 5% of the value of tangible assets and payroll costs get exempted, but Hungary wants a higher rate. Could a global minimum tax work even if Hungary doesn’t agree to the terms? Sort of—the proposal is designed so that it’s more beneficial for countries to join if larger economies sign on. And even if a country signs the agreement, it’s not obligated to adopt the global minimum tax into law. So, it’s probably safe to say, Hungary will weigh all of its options.   

Week of 9/15/21: Are Digital Services Taxes Here to Stay? 

One of the potential dealbreakers for the U.S. in signing on for the OECD’s global tax reform has long been the question of digital services taxes. These unilateral taxes are often imposed on revenue—not profits—for digital services like online advertising, and they are issued in varying amounts at the discretion of each individual country (3% by Belgium, 5% by Czech, 7.5% by Hungary, and so on). The question the U.S. has been asking is, “If we sign, will these taxes go away?” According to the OECD in July, the answer was a simple, yes. In fact, the organization said, the plan includes, “the removal of all digital services taxes and other relevant similar measures on all companies.” But now some experts are thinking these unilateral levies may be here to stay. Pillar 1 reallocates Amount A (residual profits) based on where revenue is earned—not a company’s physical presence—but only a small number of companies (79 at last count) will be affected. Some countries may feel like companies should pay some kind of digital services tax and some experts think tax authorities will reinstate those levies under another name.  

Week of 9/20/21: What do Developing Countries Think of the OECD’s Global Tax Proposals? 

Global tax reform debates continue—especially for developing countries. In fact, they’ve worried they wouldn’t fare very well under the Pillar 1 and Pillar 2 proposals from the beginning. Their issues? Let’s start with Pillar 1. Under the OECD’s plan, Pillar 1 reallocates 20% to 30% of residual profits generated by companies with turnover of more than €20 billion and profitability above 10%. Pillar 1 is estimated to impact the top 100 companies in the world. The G-24 group of developing countries says, that’s not enough—more income needs to be redistributed. In a statement on Sunday, September 19, the group claimed that “not less than 30%” of multinationals’ residual profits should be reallocated. The G-24 feels given that Pillar 1 affects only a handful of companies, less than 30% won’t make a meaningful difference for developing countries, which desperately need the revenue. The G-24 isn’t satisfied with Pillar 2 either—the group wants a global minimum tax that’s more than 15%. And while they haven’t said just how much higher, in the past, developing-country representatives have asked for a minimum as high as 25%. The OECD’s proposals are on track to be finalized at the end of October, when 140 countries will negotiate the last of the details.  

Week of 9/20/21: Will Ireland Agree to a Global Minimum Tax? 

While most of the EU seems to be looking forward to a global minimum tax, Ireland has been notably opposed. “Not to worry,” was the attitude of EU Economy Commissioner Paolo Gentiloni, who said on an Irish radio show that he is confident that they will be able to reach some sort of compromise. He stressed that the advantages of doing business in Ireland aren’t limited to “a small difference in a corporate minimum tax.” (Ireland’s corporate tax rate is 12.5%, while the proposed global minimum corporate tax rate stands—at the moment—of “at least 15%.”) He stressed Ireland’s other advantages: a sound business environment, educated workers, and of course, English as a native language never hurts either. The Commissioner insisted his visit to the Emerald Isle on Monday (September 20) wasn’t to do any arm-twisting, but merely to discuss the importance of an agreement. During the visit, Irish Finance Minister Paschal Donohoe told the EU Commissioner that Ireland was trying to see if an agreement was possible, but he made no promises that Ireland would sign on.