International tax reform – OECD negotiations must continue

On 18 June, the OECD General Secretary released on a statement calling on all countries to remain engaged in the OECD international tax negotiations with a view to reaching a global solution by year end. This statement follows press articles reporting that the United States have withdrawn from the negotiations.

For TUAC, tax negotiations must continue and be enhanced to effectively curb under-taxation of businesses – through effective changes of corporate income tax rules, stop the tax race to the bottom – through a global agreement on minimum taxation rights, and ensure fair taxation for all, including for developing countries.

TUAC welcomed the launch of the negotiations under the realm of the G20 in 2017. The aim was to achieve fairer taxation of the digital economy. The Covid-19 crisis is adding to the urgency to curb under-taxation and to stop tax competition. It is essential that the OECD negotiations continue and that every effort is made towards reaching an ambitious and fair deal on a global minimum tax rate, which offers positive prospects in terms of fighting tax competition and increasing public revenues globally.

The United States are reportedly pulling out of “pillar one” of the OECD negotiations whilst maintaining a support of principle for the “pillar two”. Pillar one aims at reviewing the allocation of corporate tax revenues between countries. Highly profitable digitalised businesses could have to pay a small amount of tax in the countries where sales are made. Pillar two would introduce a minimum corporate tax rate at global level. Countries would be legally entitled to tax back the under-taxed foreign profits of their entities. Already in February, the US had announced its intention of claiming a “safe harbour” from pillar one (See TUAC reaction). However, as both pillars have until now always been treated as a package the recent US announcement raises serious concerns about the future of OECD negotiations.

Concerning pillar one, the proposed compromise fell short of TUAC expectations. It would be the source of considerable complexity whilst the actual impact on corporate tax revenues would be very small. Should the OECD fail to achieve an agreement on pillar one, an increasing number of countries will introduce their own digital services taxes in a bid to raise much needed revenues. The threats from the US government to apply significant trade sanctions to such countries raise the prospect of escalating tensions in an already worrisome multilateral context. The best way forward is for an in-depth and lasting reform of the international tax architecture, based on unitary taxation and enhanced tax transparency.