"Negotiators trying to hammer out a global deal to change how and where large technology companies are taxed failed to reach an agreement this week, but participants said they are close enough for now to avert a damaging alternative: a new trade war between the U.S. and Europe.
Meeting on Monday and Tuesday in Paris, tax officials from 143 jurisdictions had hoped to seal an accord on a new way to divide the taxes levied on the profits of about 100 of the world's biggest companies. Such a deal -- part of a series of changes to how, where and how much multinational companies are taxed around the globe -- would reallocate the taxation of some $200 billion in corporate profits worldwide.
The global initiative would let countries capture tax revenue from the large companies at the center of the information-based economy. Currently, those companies can operate worldwide while concentrating their profits in their home countries or in small, low-taxed jurisdictions; they then pay relatively little tax in the more populous nations where many of their users are.
If the talks collapse, several nations have threatened to adopt special taxes on these mainly U.S. tech companies. Washington sees those taxes as hostile and could retaliate with tariffs.
A year ago, negotiators described the first half of 2023 as a hard deadline.
Officials guiding the talks said reservations by some countries are preventing a deal. But they said those concerns should be resolved in the coming weeks. This would pave the way for a treaty to be agreed to by the end of this year.
"There is huge convergence and agreement on the major components," said Manal Corwin, head of tax policy at the Organization for Economic Cooperation and Development, which has been shepherding efforts to revamp the tax system for the past decade.
Failure to conclude a deal quickly could lead to a free-for-all in which governments around the world implement targeted levies on large technology companies -- known as Digital Services Taxes -- likely prompting the U.S. to retaliate for what it sees as unfair treatment of American businesses.
Lily Batchelder, assistant U.S. Treasury secretary for tax policy, said the talks have made significant progress.
The talks on dividing tax revenue build on a 2021 pact that also saw governments set a minimum tax rate on the profits of a larger pool of businesses that operate internationally. Those two parts of the talks are technically separate but politically linked.
The piece of the agreement under discussion this week would mark the most sweeping overhaul in a century of the rules that determine where profits can be taxed. It is intended to alter the thousands of treaties between nations that determine how much individual governments receive, and to prevent countries from imposing novel taxes on companies.
For now, 138 jurisdictions have given it their backing -- Canada, Sri Lanka, Pakistan, Russia and Belarus oppose it. The pact puts Canada at a disadvantage compared with countries with pre-existing digital taxes, said Finance Minister Chrystia Freeland. Canada can't support an extended pause on digital taxes without a firm timeline for a final deal, she said.
More problematically, legislators in the world's largest economy -- the U.S. -- are divided and wary, casting doubts on the prospect of a treaty being ratified there even if the talks succeed.
The existing rules were designed in an era when businesses needed a large physical presence in a country -- such as a factory -- to make profits there. In the digital age, physical proximity isn't necessary to serve a nation's customers.
Under the current plan, the standstill on unilateral taxes would be extended until at least 2025 to give legislatures time to approve the new rules. Some 30 countries that host 60% of the taxed companies must sign the convention by the end of the year for the extension to take effect." [1]
1. World News: Negotiators Say Global Tax Deal Is Close. Hannon, Paul; Rubin, Richard.
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 13 July 2023: A.9.
