It took eight years and eight months of intense negotiations for 137 countries to agree the global tax deal they signed in October. Hailed as the most important international tax reform in a century, now comes the hard part — implementing it.
If that happens, governments around the world will gain an extra $150bn a year of corporate tax revenues. Although multinationals will pay more, they will get a level playing field — ensuring their competitors cannot pay less than they do. And some of the public anger roused after the 2008 financial crisis by multinationals’ use of tax havens will be assuaged.
“The international tax system badly needed reform,” said Janine Juggins, executive vice-president of global tax and treasury at Unilever. “It’s in everyone’s best interests to move to a more stable system,” she told the FT Global boardroom conference in December.
But turning the political agreement into legally binding commitments may prove a long and hard slog. And ironically the US, a main instigator of the deal, could in effect kill it owing to the polarised politics that so often block domestic legislation.
“Everyone knows that nothing is signed yet,” said Alex Cobham, chief executive of the Tax Justice Network pressure group.
Countries need to legislate to implement the global minimum corporate tax rate of 15 per cent — known as ‘Pillar Two’ of the global tax deal — by the end of 2022, in order to bring it into effect from 2023.
The global minimum rate will be the “easy” part, said Reuven Avi-Yonah, professor of law at the University of Michigan. “It doesn’t require change in the tax treaties,” he said. “You really only need the agreement of the big economies, where most of the multinationals are based, to make it happen.”
Encouragingly, Ireland and Cyprus have already announced increases in their corporate tax rate from 12.5 to 15 per cent. The EU has also published a directive with its 27 member states now needing to introduce legislation to enact it.
The far harder part of the tax agreement centres on how to get the world’s largest multinationals to pay more tax where they actually make their sales, rather than where they have a physical presence. This is necessary to avoid the threat of trade wars driven by tax policies such as digital services taxes.
The issue focuses on US tech companies such as Amazon, Google, Apple and Facebook. Google UK, for instance, paid £50m in corporation tax last year despite its UK subsidiary posting revenues of £1.8bn. This is because Google UK is primarily used as the marketing and sales division of its European operation, which is headquartered in Ireland, where taxes are lower.
The challenge is that getting countries to agree to this reallocation of tax rights, known as ‘Pillar One’ of the deal, requires a series of simultaneous changes to global tax laws.
One way to achieve this would be for all of the tax deal’s 137 signatory nations to amend their network of bilateral tax treaties — but that is highly time-consuming. A quicker way, recommended by the OECD, is to enact a legally binding multilateral convention that countries sign, then ratify at home.
Countries are working at the OECD in Paris to draft such a convention. The aim is to reach agreement on the implementation by around April; each country would then need to ratify the convention in its own legislature in time for the rules to come into effect in 2023.
But such international treaties are usually anathema to the US — and Republican senators are opposed to it.
The Biden administration believes it can be done via a congressional agreement or other means which would be approved by a simple Senate majority clinched via the casting vote of the vice-president, rather than the two-thirds majority required of treaty ratification. But the jury is out on whether this can actually work.
Dan Neidle, a UK-based tax partner at Clifford Chance, a law firm, warned that attempts to sidestep the problem by entering into an arrangement that was not a treaty as such could be subject to legal challenges in the US and elsewhere.
“Everybody knows that this [implementation] is a question,” Pascal Saint-Amans, head of tax administration at the OECD, said. “But the working assumption is, and we have extremely strong signals from the US administration . . . this will happen.”
Others are more sceptical. “My own view is no way can Pillar One be implemented in the US,” said Avi-Yonah. Any “workarounds” the administration tries to bypass the Senate arithmetic would be “novel”, added Mindy Herzfeld, professor of tax practice at University of Florida Levin College of Law.
Meanwhile, even the ability of the US to pass the easier global minimum tax reform looks questionable. Draft legislation on the reforms are included in the Biden administration’s $1.75tn Build Back Better infrastructure bill, but it is struggling to pass through Congress.
Failure by the US or another major economy to ratify this part of the agreement could derail the whole project, some of those involved have warned.
“We want the whole world to embark on this deal, so we need ratification in all the countries,” Pierre Gramegna, Luxembourg’s finance minister, said. “The political risk is if a huge economy like the United States or China [or] countries like that . . . drop off.”
If that happens, developing countries that complain the deal will bring them little tax revenue may refuse to implement the rest.
There could also be a transatlantic tax war as European countries such as France, Austria, Italy, Spain and the UK reinstitute digital services taxes on big US tech firms that they had agreed to drop in exchange for the implementation of the global deal.
“It would be wrong to assume this problem is not going to happen,” said Neidle.
The OECD wants the whole deal in place by 2023. But previous reforms to the international tax system have taken countries an average of two years to introduce — with some taking as long as seven years.
“This one is harder and more complex,” said Neidle. “Why is it going to be quicker?”