Hopes of global tax agreement rise as US changes tack

The prospects of a historic and wide-ranging global tax agreement in the middle of this year has been significantly enhanced by the position adopted by the Biden administration.

President Biden would not only like to see the US company tax rate lifted to 28 percent from 21 percent, but also important modifications to US international tax rules. Currently, the US has a regime called “GILTI”, or Global Intangible Low Taxed Income, which acts as a global minimum tax for US companies at a rate of little over 13 percent, but with an exclusion for 10 percent of the value of tangible goods located outside the US.

The Biden administration would like to see the GILTI rate lifted to 21 percent, an elimination of the 10 percent exclusion and a jurisdiction by jurisdiction calculation of the minimum tax, rather than global ‘blending’.

The significance of the US changes is that they are in synch with the long-running OECD-G20 proposals, through an “Inclusive Framework” of nearly 140 countries, for a global minimum tax for large multinationals, referred to as Pillar 2.

Previously, it has been thought that the rate was likely to fall halfway between a suggested band of 10 percent-15 percent at 12.5 percent. With the change in the US position, the final position negotiated may well be at the top end of the range at 15 percent, or possibly an even higher figure.

The other key part of the OECD agenda concerns a change to the way we have divided international taxing rights between countries in the last 80 years or so through tax treaties. This is referred to as Pillar 1 and involves a reallocation of profits by certain large groups of companies to a jurisdiction where sales are made, or the “destination” of production, even though a company might not have a taxable presence in that country based on the traditional tax treaty rules.

The previous US administration proposed these new rules should be a “safe harbour” which meant they would effectively be optional and, many thought, ineffective. Importantly, this has been dropped by the new Biden administration. However, the US still does not want to see these new rules applying solely to its digital companies. In the last 6 months the Pillar 1 talks have involved an extension of reallocation of taxing rights to about 2,300 multinationals with a turnover of greater than Euro750m.

Just recently, however, it has been reported that the US would support a Pillar 1 reallocation that would involve only the largest 100 companies. This has been seen as very positive as it demonstrates the willingness of the US to come to the negotiating table.
That said, there are many countries including Australia and some developing exporting nations who will wish to see current exclusions in Pillar 1 maintained. Given that energy and natural resources are currently among those sectors exempted, Australia will continue to have a strong interest in this debate.

The driving force behind the need for a solution on Pillar 1 is the rise of so-called Digital Services Taxes (DSTs). These are taxes on turnover and not profit, applying to providers of digital services where the service provided is cross-border. A significant number of countries have introduced DSTs, or plan to do so, although the collection of taxes or plans have been paused depending the outcome of OECD negotiations. They are very much a second-best, unilateral, option where there is a failure to find new international norms.

Ultimately what we are seeing is the confluence of various streams of proposed tax changes. Primarily there is the change in the US view on international tax rules, sparked by the new administration, and its willingness to negotiate on a multilateral basis. This feeds in to changes on a reallocation of taxing rights to countries where sales take place and to the shape and prospects of a global minimum tax.

If Pillars One and Two are agreed, not only will around US$100bn be raised for governments but it would also significantly reduce the chances of a proliferation of DSTs, which is a very desirable outcome in terms of the coherence of the international tax system.

Whilst there remains a clear risk that the confluence of these streams will form a whirlpool of inaction, the re-engagement of the US with the OECD process makes it more likely they will result in the most dramatic change in international tax rules that we have seen and one which will likely last for many decades to come.

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