OECD tax plan targeting multinationals beset by clashes

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The world’s biggest economies are this week attempting to rescue a landmark OECD tax deal after difficulties over implementation threatened to scupper the push to make multinationals pay more tax where they operate.

Representatives of more than 130 countries have gathered in the OECD’s Paris headquarters for three days of talks on applying a key part of a groundbreaking tax deal that has been beset with delays and problems over ratification.

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

Officials also hope a ban on so-called “digital services taxes” that is set to expire at the start of 2024 can be extended until a consensus on global reform is reached. Without an extension, trade wars are likely to ensue as countries go it alone in their attempts to recover more revenue from the world’s 100 largest multinationals that are covered by the deal.

Negotiators hope to push back the ban to 2025 over fears that some countries will struggle to ratify the deal. Among them is the US, where many of the world’s largest tech firms are headquartered.

A person close to negotiations said “the big political elephant in the room” was whether the US would be able to get Congress to approve any deal agreed at the OECD.

While the Biden administration supports the OECD deal, which was provisionally agreed on in the autumn of 2021, tax treaty changes require a two-thirds majority in the Senate to ratify. Biden’s Democrats are outnumbered in the Senate by rival Republicans, many of whom bitterly oppose the deal.

Some emerging markets, meanwhile, fear the global solution to taxing Big Tech — dubbed “Pillar one” in global tax circles — will lower their revenue take. “India in particular is being very difficult,” said one person close to negotiations.

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

At present, finance ministries can only tax a company’s income if it is physically present in their country — an approach that is no longer fit for purpose in the era of digitalisation.

The new system would instead require multinationals to pay taxes based on where sales are made — a shift that the OECD has estimated will change where around $200bn in profits is taxed.

Specifically, the changes will apply to multinationals with more than €20bn in revenue and a profit margin above 10 per cent. For those companies, 25 per cent of their profits above the 10 per cent margin would be taxed in countries where they have sales.

India and other emerging markets’ objections centre on this formula, which they argue will favour developed countries, simply because the largest multinationals make more sales in richer economies. India also has a digital service tax that it would have to give up, if it were to sign the deal.

Developing countries’ unhappiness about the way negotiations have gone is leading some to ignore the ban on digital services taxes and pursue their own measures to tax tech giants.

Sri Lanka originally took part in the OECD negotiations but in 2021 decided against endorsing the political agreement. Now suffering a crippling economic crisis that has seen it call in the IMF for a bailout worth $3bn, it is mulling 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 drop the plan and sign up to the OECD’s deal. The IMF’s position is “this new tax would defer foreign direct investment to Sri Lanka”, an official within the Sri Lankan government said.

“Unilateral measures are not the best solution, the optimal solution is definitely co-operation . . . but the most realistic solution for developing countries now is to go with unilateral measures,” said Verónica Grondona, former chief of international tax at Argentina’s tax authority who up until January was involved in the talks.

Businesses that have struggled to comply with the current patchwork arrangement are nervous about the possibility of the deal fracturing.

The International Chamber of Commerce warned last month that the significance of “a stable and predictable tax system” to companies “cannot be overstated”. Only a ratified, global treaty that is widely implemented could “achieve this goal”, it said in a letter to the OECD secretariat last month.

The talks conclude on July 12. Negotiators are aiming to publish an agreed text on the global rule change, which they see as an important step towards pressing ahead with a signing ceremony towards the end of this year. Countries are expected to ratify it in their legislatures after that.

However, even if a provisional agreement is reached this week in Paris, one person close to the negotiations said it was “not clear” whether there would be a “critical mass” of signatories by the close of 2023.

Additional reporting by Mahendra Ratnaweera in Sri Lanka