Organization for Economic Cooperation and Development (OECD) Delays International Tax Implementation
Craig Anderson, C.P.A., SCRP, SGMS - Jul 15 2022Proposal may hamper the practice of companies setting up business around the world based on lowest tax jurisdictions
The Organization for Economic Development Cooperation and Development, an intergovernmental organization with 38 member countries, announced this week that an international tax proposal, that was agreed upon last October will not be implemented at least until 2024.
The global tax agreement, which was agreed upon by more than 130 countries, is aimed at addressing rampant cross-border profit shifting that cost governments an estimated $100 billion to $240 billion in tax revenue annually and represents a major shift in how multinationals are taxed. The agreement is intended to increase taxes substantially on many large corporations and to end an international fight over how technology companies are taxed.
The agreement will expand a country’s taxing power to include a share of profits from companies that make sales in the country regardless of a company’s physical location and it would establish a 15 percent minimum tax applied to cross-border investments by large multinational corporations.
Many jurisdictions around the world presently offer tax preferences or structure their tax rules in such a way that allow companies to be taxed at rates below the 15 percent rate envisioned by the minimum tax.
The new rules were promised by mid-2022 as part of a multilateral deal negotiated by the OECD. The delay increases the likelihood that at least some of the adopting countries will lose patience with the process and develop their own national taxes, especially on the large U.S. bases tech companies, on their own.
Neither the U.S. nor the E.U. members have passed needed legislation to implement the minimum tax. The legislation here at home is wrapped-up within Democrat led fiscal legislation which does include the U.S. adopting a 15percent minimum corporate tax on book profits, but also includes other tax reform on debated topics such as a surtax on high earners and the elimination of the $10,000 SALT cap.
The US has a domestic policy package that the Republicans think is too generous and Democratic progressives that don’t think the package goes far enough. Adding to the difficulty is getting this accomplished with the distraction of mid-term elections and a possible end-of-year shift of party majority.
The EU also has its own struggles: Poland had been opposing some of the plan since last year, although they now seem more supportive, and Hungary is now the country vetoing the EU’s effort to get adoption of the plan by the start of 2024. The U.S. Treasury announced last Friday that it is moving to terminate its tax treaty with Hungary.
It is clear that bipartisan cooperation is desperately needed for the U.S. to move forward. Negotiators on all sides fear that missing the 2023 deadline could result in a global free-for-all, in which this concentrated effort for uniformity will be replaced by governments enacting their own novel, but likely uncoordinated taxes. A failure to implement the agreement could also give counties outside the US more rights to tax firms like Amazon and Meta, and possibly igniting the digital trade disputes that began during the Trump Administration.
History has shown that such individual actions often result in new trade sanctions by the other EU (and U.S.) Members.