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OECD tax deal ‘choice between two bad things’

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After eight years of talks, some experts are worried developing economies will continue to lose revenues

After eight years of negotiation, the OECD reached an outline deal on October 8 to reform taxation of multinational companies, but critics argue the main winners are the US, Big Tech and low tax countries like Ireland. Some fear developing countries will gain little and might even lose money, as they must abolish some of their own taxes on multinationals.

The agreement was presented to the G20 finance ministers’ meeting in Washington on Wednesday. The G20 had been urging parties to strike an agreement so they could move on and deal with other matters, said a source familiar with the talks.

“It’s the kind of proposal that was needed — it’s proved that you can go beyond the status quo and introduce a radical idea like a minimum tax,” said Susana Ruiz, tax justice policy lead at Oxfam in Madrid. “But it’s not doing much to change the unfairness of the international tax system and it’s not going to provide much additional revenues” for developing countries.

It is always hard for countries, especially developing ones, to tax multinationals but is harder still with global digital companies such as Google, Amazon, Facebook and Airbnb.

They may not have a physical presence in a country but still compete with local providers which are fully taxed. Even the UK, Germany and France have decided they need to redress the balance with digital services taxes.

The US calls these discriminatory and has threatened to impose tariffs in retaliation.

To head off this crisis, stalled talks on a global compromise were restarted three years ago.

No one has signed up yet, but talks are moving to the implementation phase — there will be no more changes to the main terms.

They were in flux right up till when the deal was struck at 6pm last Friday, so even those involved struggle to know which companies and countries stand to gain or lose money.

The deal has two pillars. Pillar 1 covers multinationals with over €20bn of global sales and a profit margin over 10%. For each of these roughly 100 companies, 25% of any profits above the 10% profit margin will be reallocated from its home tax authority to countries where it does business, according to a formula. These countries can tax those profits as they wish. The OECD reckons this will reallocate $125bn of profits.

Far from “ensuring that these firms pay a fair share of tax wherever they operate and generate profits,” as the OECD claims, the deal “only covers a small proportion of their profits,” said Sol Picciotto, emeritus professor at the University of Lancaster, an expert on the issue. “The rest, and all the profits of other multinationals, will continue to be allocated under the existing rules, which are… totally irrational and unworkable.”

Tariff fears

Pillar 2 is billed as a global minimum corporate tax rate of 15%. In fact, it allows a company’s home country to top up the tax on any profits it has declared in low tax countries, so that they are taxed at a total rate of 15%. This will mainly benefit countries like the US and Ireland.

Countries could still back out. Kenya, Nigeria, Pakistan and Sri Lanka are holding out, wanting to continue taxing multinationals in their own way, but a source familiar with the talks said they were taking “big risks”. They “could see extraordinary tariffs come down from the US”.

“It’s a step forward in principle, but deeply flawed in many ways,” said Picciotto. The deal’s value would depend, he said, on whether it becomes a stepping stone to future improvements, or “whether they use it as a block to further progress.”

The G24 group of developing countries welcomed the deal and said it expected it to “yield meaningful revenues”. But a person present at the G24 discussions said: “It’s pretty open that developing countries do not feel it will be a meaningful increase in revenues, particularly if they give up the right to their own unilateral measures.”

Countries were going along with it, the person said, because “they are keen to be part of the dialogue on corporate taxation, now and later”.

Ruiz said: “There was no good alternative. They had to choose between something bad and something bad.”

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