By Doug Connolly, MNE Tax
Under an October 21 agreement between the United States and Austria, France, Italy, Spain, and the UK, the European countries can keep their existing digital services taxes in place pending implementation of Pillar 1 of the OECD global tax deal. However, multinational groups paying such taxes will receive a partial credit against future tax liability under Pillar 1.
In general, the credit will roughly equal the amount of digital services taxes that the companies pay during the transition period in excess of what they would owe under Pillar 1.
The transition agreement is a political compromise between the US, which would prefer the digital services end concurrently with the October 8 OECD agreement, and the European countries, which have already implemented the digital services taxes and would prefer to keep them fully in place until Pillar 1 of the OECD agreement is implemented.
Pillar 1 of the OECD deal, which would reallocate a portion of taxing rights of the largest multinationals to market jurisdictions, was intended to address the issue of how to tax companies that have a significant digital presence – but no significant taxable presence – in a country. The final agreement on Pillar 1 was itself a compromise that extended the provision beyond digital companies. Nonetheless, the impetus on the US side in negotiating under Pillar 1 was largely to put an end to the unilateral digital services taxes that countries around the world were beginning to enact.
The multilateral solution has generally been favored by the digital and tech companies that would be affected by the proliferation of different digital services taxes around the world. As many of the largest such companies are US-based, the US government has also generally considered such unilateral measures as discriminatory. As a result, the US has threatened trade sanctions against countries enacting them.
The October 8 OECD agreement specified that no new digital services taxes would be permitted under the deal. However, negotiations had not yet reached an agreement on existing measures. In line with the transition agreement reached today, the US has agreed to terminate proposed trade sanctions and not impose any further retaliatory trade actions in response to the European countries’ digital services taxes currently in place.
Under the transition agreement, multinationals paying digital services taxes in these countries can receive a partial credit for such taxes paid during the interim period, which will run from January 1, 2022, until a multilateral convention implementing Pillar 1 enters into force or December 31, 2023, whichever is earlier. The credit will equal the amount of the digital services taxes paid in excess of the taxpayer’s Pillar 1 liability in the first year after implementation (prorated in accordance with the length of the interim period).
Taxpayers receiving such credits will be able to apply them against their Pillar 1 “Amount A” corporate income tax liability in the relevant countries. To the extent not fully used in the first year of such liability, the credits will be carried forward to apply against future years’ Pillar 1 tax liability. Multinational groups that are not in-scope of Pillar 1 when it takes effect will still be able to benefit from the credits if they become in-scope within four years.
Doug Connolly
Doug Connolly is Editor-in-Chief of MNE Tax. He has more than 10 years of experience covering tax legal developments, previously working with both a Big Four firm and a leading legal publisher. He holds a law degree from American University Washington College of Law.
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