Global tax deal to proceed with G20 endorsement, but not all is resolved

By Doug Connolly, MNE Tax

At the end of their October 30–31 summit in Rome, the leaders of the G20 adopted a declaration supporting the implementation of new international tax rules – urging the OECD “to swiftly develop the model rules and multilateral instruments” necessary to bring the agreement into effect globally in 2023.

The support of the group of leading economies was not unexpected following the agreement on the new international tax rules by 136 countries on October 8. However, the G20 endorsement joins a series of developments that make the deal – which seemed unlikely, at best, just earlier this year – begin to look very likely to be the new reality for the coming international tax landscape.

Along with the G20 and Inclusive Framework endorsements, issues that many had seen as some of the most likely impediments to implementation are starting to seem surmountable, such as garnering unanimous EU support for a directive and passing legislation through the US Congress.

On the US side, President Biden contended last week that he has the support needed to get at least one prong of the deal through the US Congress, the global minimum tax changes. The situation remains fluid as final legislative details are worked out – and some in-fighting within the Democratic party continues – but the White House today reasserted its confidence in support for the plan.

For its part, the EU secured the support of its remaining holdouts earlier this month and is working out an implementation plan.

There are still hurdles.

Even if Biden narrowly gets the necessary global minimum tax amendments through the US Congress, implementing the changes to profit allocation rules presents a greater challenge. Adopting those rules might require a treaty, which would require two-thirds support in the Senate (a tall order), rather than the simple majority by which the minimum tax changes could pass. The administration could explore other methods, but their constitutionality could be challenged.

The implementation timeline is also ambitious. The OECD must resolve technical details for model rules and treaties to facilitate countries’ adoptions of the rules. The European Commission plans to issue a directive in December to adopt the agreement based on the OECD model rules, but the process might not be so fast everywhere. If jurisdictions fail to adopt legislation in 2022 to bring the new rules into force in 2023, the resiliency of the political will for such a deal could be further tested and begin to splinter.

There are also open questions about winners and losers from the deal.

Estimates from an EU Tax Observatory report released last week predict revenue gains in the first year from the global minimum tax will equal about EUR 51 billion in the US (USD 59 billion) and EUR 64 billion in the EU. Large developing countries would see smaller gains, such as about EUR 3.4 billion in China and EUR 2.9 billion in South Africa. Smaller developing countries would see even less.

Those estimates only address estimated gains under the global minimum tax and not the anticipated revenue gains (or losses) from the other prong of the deal, the profit reallocation rules. Moreover, there are open questions about the extent to which the changed rules will impact corporate behaviors and how that could further affect revenue estimates.

US Treasury Secretary Janet Yellen was in Ireland today attempting to reassure the nation – which has agreed to (partially) give up the 12.5% corporate tax rate that has propelled its economy – that US companies will not abandon it.

“There are hundreds of US companies with real roots in Ireland,” Yellen said in remarks to the Irish finance minister and American Chamber of Commerce Ireland. “Was the corporate tax rate one reason they came? I would have to imagine yes. But it was not the only reason, and it wasn’t the reason they stayed, or the main reason they are here now.”

Ireland did not bend unilaterally. The US and EU made concessions from the terms that they favored to bring Ireland into the deal.

However, while there is a sense that Ireland’s concerns were heard in negotiations, many contend that not enough was done to address the needs of developing countries and that failure could undermine the deal in the end.

In endorsing the OECD deal, the G20 did “note” the OECD’s work on helping to address the tax needs of developing countries and to identify “possible  areas  where  domestic resource mobilisation efforts could be further supported.”

In an October 31 article, noted “tax justice” advocate Richard Murphy agrees that the “OECD has to do more to help developing countries.” Nonetheless, he contends that the “almost universal condemnation of this deal amongst tax justice groups” is misguided. 

Murphy argues that the agreement is not as strong as ideal for tax justice purposes, but that it beats the alternative – i.e., nothing. Both a floor to tax competition (even if rather low at 15%) and a formulary apportionment approach to profits (even if only affecting a portion of profits of about 100 companies) are still significant developments.

The OECD agreement does have some teeth. Ireland’s concession to allow the deal to happen was public in the negotiations, but it’s not the only jurisdiction in a position of having to reevaluate its tax policy.

Singapore, for instance, is looking into how to modify the tax incentives that it uses to attract companies to its borders, according to a November 1 Reuters report. Although Singapore’s corporate tax rate is 17%, the incentives result in effective tax rates below the accord’s 15% minimum effective rate.