OECD and Ireland strike tax deal as others in EU line up, developing countries shrug

By Doug Connolly, MNE Tax

Ireland announced October 7 that it is joining the OECD tax deal, cutting the holdouts down to just five nations out of the 140 in the Inclusive Framework that are scheduled to meet Friday, October 8, to review the agreement. Meanwhile – as other European countries rush to secure their own terms – developing countries, like Argentina, contend they are being “forced to choose between something bad and something worse.”

For instance, to get its endorsement for the deal, Hungary seeks a 10-year transition period for the global minimum tax, according to a report in Hungary Today. It also wants certain exemptions that will enable it to continue to use tax competition to accelerate domestic economic growth.

Meanwhile, Malta is set to propose to the OECD that the global minimum tax be limited to only corporations with a “huge turnover,” according to the Times of Malta. This would allow the island nation to continue to offer a tax rate below 15% to compete for investment by multinationals with turnover below the high threshold.

For its part, Ireland had conditioned its endorsement of the deal on the OECD specifying that the minimum tax rate be defined as precisely 15% – not “at least 15%.” The OECD has now accommodated. Ireland stated that its current 12.5% corporate tax rate will continue to apply to companies outside the scope of the global minimum tax, i.e., those with revenues less than EUR 750 million (approximately USD 866 million).

Outside Europe, Argentina’s Economy Minister Martin Guzman, who described the country’s choice in the negotiations as between bad and worse, contended that developing countries’ concerns are not being addressed. Speaking in an October 7 panel hosted by the international tax reform coalition ICRICT, Guzman said that there is a “lack of proportionality” between what developing countries are being asked to commit to and what they’re getting.

Guzman explained that developing countries are being asked to give up unilateral measures to tax multinationals, while they are getting very little in profit reallocations under Pillar 1 of the agreement. Moreover, he complained that the methodology to assess the impacts of the agreement has not been transparent, and developing countries lack the information they need to make informed decisions. Nonetheless, he added that they are hoping to continue to work over the next few weeks to make more meaningful progress.

Speaking in the same panel, Nobel-winning American economist Joseph Stiglitz suggested that the lack of information on the impact for developing countries could be intentional, as the information would likely show that the deal’s not going to mean much for them. Rather, he contended, the deal has been essentially a high-level negotiation between European countries, which want to tax big US tech companies, and the US, with its ambitions to reverse the downward trend in its corporate tax revenues without placing itself in a strategically uncompetitive position.

Stiglitz recommended that developing countries should agree to some terms, like the minimum tax and “moving away from the transfer pricing system.” However, he added that they should seek their own carve-outs, as developed countries have done. He further suggested that they should not give up unilateral measures to any greater extent than what they’re being compensated for under Pillar 1.

The OECD agreement, as framed, has been conditioned on the removal of unilateral measures, and any continuation of them would no doubt create tensions with the US and US businesses. 

The US Chamber of Commerce is also critical of the ongoing negotiations, although generally for reasons opposed to the positions of developing countries.

In October 6 comments to US Treasury Secretary Janet Yellen, the Chamber stressed that “any agreement must be conditioned upon a complete withdrawal of unilateral measures.” It also emphasized the importance of securing an agreement on binding dispute resolution – another sticking point for developing countries that fear such arrangements might be skewed against them. The Chamber further urged that the deal must be the final deal and not a first step towards more formulary apportionment or more tax rate increases.