Update on the Status of the Global Tax Deal

Category: Corporate Tax

Nov 21, 2022

In October 2021, 136 member nations agreed to a deal outlining significantly changes to international tax rules governing multinational corporations, brokered by the Organisation for Economic Co-operation and Development (OECD). Now, over a year later, delays in implementation and disagreement over policy details have pushed the timeline for Pillar One, which changes where large companies pay taxes, to mid-2023, and Pillar Two, which introduces a global minimum tax of 15{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f}, to mid-2024 at the earliest.

However, it appears increasingly unlikely full implementation will occur on this schedule, as both the US and the EU have encountered snags in their legislative processes. In addition, Pascal Saint-Amans, Director of the Center for Tax Policy and Administration at the OECD and chief architect of the agreement, retired from the organization on 31 October 2022, casting further doubt on the agreement’s path forward.

Obstacles to the Global Tax Agreement

In Pillar One, estimated to affect approximately $125 billion in profits, companies with more than €20 billion in revenues and a profit margin above 10{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f} would have a portion of their profits taxed in the jurisdictions where they have sales; currently, a company’s profits are largely taxed where they have a physical presence. After a seven-year review period, the threshold could drop to €10 billion. This change represents a limited redistribution of tax revenue from countries where large multinationals operate to the countries where they sell goods and services.

As noted by the Tax Foundation, for Pillar One to work, all countries must adopt the same rules to avoid having companies deal with a myriad of different approaches around the world. In the US, tax treaties must be ratified by 67 votes in the Senate. Given the nearly even split between parties after the midterm elections, it is unlikely that there will be the bipartisan support necessary to adopt Pillar One in the US by the mid-2023 deadline.

Pillar Two, the global minimum tax, would apply to companies with annual global sales of over €750 million, and was initially estimated to increase tax revenues by $150 billion worldwide. Model rules were released in December 2021 to serve as a template for jurisdictions to translate into domestic law; the Pillar Two framework allows more flexibility for countries to design their laws, with the view that if enough countries around the world adopt the rules, a significant share of corporate profits would be taxed at a 15{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f} effective rate.

While the Inflation Reduction Act recently passed in the US included a 15{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f} corporate tax minimum, it omitted key provisions necessary to implement the global minimum tax as agreed to at the OECD. At the same time, in the EU, unanimous agreement of the 27 member states in the EU is needed to enact the current Pillar Two implementation proposal, a proposal which Hungary has vetoed. It is possible individual EU members will unilaterally implement their own versions of Pillar Two outside of the EU legislative mechanism if opposition continues. Germany, France, Italy, Spain, and the Netherlands have all signaled their intention to move ahead with the plan by introducing their own national legislation.

The Risk for Businesses

In an interview with the Financial Times, Saint-Amans spoke of the danger of reviving trade wars should the US and Europe fail to implement the deal, saying, “I see some serious risks of unilateral measures, and therefore trade sanctions, at a time when countries which are allies, in a difficult political context, may not want to trigger trade wars for a tax issue.” Of particular concern was possibility of European countries enacting digital services taxes, which the US has threated to sanction in the past.

It remains to be seen if progress will ultimately be made on implementing the global tax deal in light of challenging circumstances on both sides of the Atlantic. In the meantime, companies are advised to monitor developments and consult their professional tax advisor to assess any potential impact and inform planning.

For more information, please contact your US tax advisory team at youradvisor@fernwaysolutions.com or visit us at www.fernwaysolutions.com.