Global tax reform has taken a small step forward—but only by delaying tough conversations. Another wave of political brinkmanship over the thorny question of how Silicon Valley’s technology giants are taxed is all too possible.
On Friday, the Organization for Economic Cooperation and Development announced a deal to move ahead with a single framework for reallocating corporate taxation rights—there were previously three rival proposals—and plans for a minimum tax. Officials from 137 nations now aim to agree on an approach by July and a solution by December.
The timing is very ambitious and there are still a number of “critical differences” to be worked out. President Trump’s threats of a trans-Atlantic trade war loom large. Politicians around the world will need to make difficult compromises if the project is to succeed.
Failure to reach an agreement will end the truce agreed by the U.S. President and his French peer Emmanuel Macron in January. France will start charging big companies 3% on their digital revenues, and the U.S. is likely to follow through on its threat to hit French luxuries with a 100% tariff. A couple of dozen more countries are working on their own taxes on digital revenue and might end up hit with retaliatory U.S. tariffs too.
Taxing TimesEstimated revenues from Digital Services Tax in 2020 if implemented (Country—rate)Source: Governments, PWC, Tax FoundationNote: 1€=$1.11
Italy — 3%France — 3%U.K. — 2%Austria — 5%€0 million€50€100€150€200€250€300€350€400€450€500€550€600€650Italy — 3%x€600 million
That would be a grand mess for global companies. They wouldn’t get the tax certainty they crave, could pay some double tax on earnings and may even bear some of the cost of tariffs.
The political tussle started because many countries, particularly in Europe, lost patience with what they see as multinational companies shifting international profits to avoid tax. Technology companies are a particular focus because they can provide services and earn revenue in countries where they have few physical assets. The likes of Apple, Alphabet and Facebook have booked a tax rate of less than 10% on their overseas profits.
A U.S. proposal reinvigorated long-stalled negotiations and formed the basis for the latest OECD draft framework. The talks are contentious as changes to the status quo will likely move tax revenue between countries and increase companies’ costs. But politicians and executives alike would prefer a global compromise to a patchwork of new digital levies and a trade war.
The project almost stalled again in December when, after public consultations, the U.S. sought to add a so-called safe harbor clause to the new rules. This would allow U.S. companies to choose between the new or old tax regimes should Washington have trouble passing new tax legislation—a precaution likely to undermine the reform.
French President Emmanuel Macron has reached a truce with President Trump over plans for a digital tax on tech giants. PHOTO: BRENDAN SMIALOWSKI/AGENCE FRANCE-PRESSE/GETTY IMAGES
In a bid to keep negotiations alive, the OECD has put the safe harbor request to one side as an implementation issue. It is a fudge, but it just might work. Safe harbor remains a threat that Washington can use as a bargaining chip in negotiations. Parking it frees up negotiators to work on the more technical issues of the new tax framework. Other contentious issues that arise might be parked alongside it.
The compromises required on these issues will need to be made by top politicians from a number of nations. The threat of a trans-Atlantic trade war helped clear some roadblocks in last week’s talks and is keeping the pressure high, but finding an agreement will still require tough decisions. The second half of 2020, just as the U.S. political cycle reaches fever pitch, could well bring more tax drama.
