Observations on the OECD Secretary-General’s comments on delay of global tax agreement

Aiming for implementation of a historic ‘two pillar’ tax agreement involving 139 countries by 2023 was always an ambitious target.

Comments by OECD Secretary-General Mathias Cormann at the World Economic Forum in Davos suggest the implementation of Pillar One of the global tax agreement is likely to be deferred until 2024. Pillar One concerns the reallocation to jurisdictions of taxing rights over a portion of the profits of the largest, most profitable multinationals.

However, this doesn’t mean the delay will necessarily extend to the Pillar Two – the proposal to set a global minimum tax rate of at least 15 percent. Secretary-General Cormann noted it is now up to individual jurisdictions to implement the Pillar 2 Model Rules into their legislation and that it was out of the OECD’s hands.

Negotiations on the two pillars of the OECD’s landmark ‘Inclusive Framework’ proposals have been proceeding in parallel, but Pillar Two is the more advanced and the Model Rules have been agreed. Negotiations continue on the details of Pillar One, with final agreement now not likely until the end of the year.

Australia could reasonably expect to pick up some extra tax revenue under each of the two pillars. With carve outs for extractives and regulated financial service activities, there are expected to be very few Australian headquartered groups in scope of Pillar 1.  Pillar 2 has much wider application.

The incoming Australian government has confirmed that it intends to implement both pillars but has not committed to a fixed timeline, although it is seeking to align with other OECD members. However, even for the more advanced Pillar 2, with a busy legislative agenda for the new government it will be challenging to enact the rules into domestic legislation by the start of 2023.

Some jurisdictions may not want to take any action on Pillar 2 until there is more progress on the Pillar 1 negotiations. The EU member state finance ministers have postponed their scheduled debate on Pillar 2 implementation until later in June. But with an eye on post-pandemic budget repair, other jurisdictions may want to forge ahead with Pillar 2 implementation for 2023 to reduce the risk of ceding rights to collect “top up tax” to others.

To take effect, Pillar 1 would require a multilateral instrument that amended a host of bilateral tax treaties to incorporate the new taxing right.  It is therefore not so easy for jurisdictions to move forward with implementing it independently of one another.

This would be why Mr Cormann appeared to acknowledge that a 2023 start date for Pillar 1 is now unlikely. Domestic implementation of a global minimum tax is not expected to require treaty changes, and as such jurisdictions can proceed independently now that the Model Rules have been agreed.

Nonetheless, the incentive to get Pillar 1 agreed and implemented is that otherwise we could expect a variety of individual digital services taxes, or similar, to emerge or be reactivated. These would be a much greater headache for impacted multinationals and could be a relative drag on innovation and productivity.

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