Officials at organizations of developing countries said the U.S. and European governments shouldn't punish them for taxing digital service providers in the West while a fundamental tax rewrite hangs in the balance. (AP Photo/David Goldman)
Marilou Uy, director of the Intergovernmental Group of 24 on International Monetary Affairs and Development, told Law360 her organization consistently conveyed in written statements to the OECD its concern that their member states stand to gain little and that the terms don't address their needs.
"You have to give up all rights to digital services taxation for the future — forever — and for all companies in exchange for 25% of the residual profits that you will get from in-scope companies," Uy told Law360, referring to a tradeoff the OECD has said it will codify into a treaty this year.
As the G-24 secretariat's director, Uy coordinates developing countries on monetary and development issues at international forums such as the Organization for Economic Cooperation and Development on behalf of members including China, India and Brazil, which all signed a political statement supporting a blueprint for the OECD's global tax deal in October. Economies with 90% of global gross domestic product endorsed the plan to create a new taxing right called Amount A by drafting and signing a multilateral convention to bypass bilateral tax treaties and other overlapping rules by the end of 2023.
"Moving away from physical presence is an important step forward," Uy said, referring to the portion of the sweeping tax plan that would give more taxing rights to countries where companies have customers but lack a physical presence. The reallocation component of the global tax rewrite is known as Pillar One, while Pillar Two would impose a worldwide minimum corporate tax rate of 15%.
"I would not be able to predict how home countries would react to emerging markets and developing countries if they keep their digital services taxes, but that would be one of the fallouts to watch for" if the OECD's solution doesn't work, Uy said.
When a company such as Google sells ads to a taxpayer in a country where it isn't incorporated, Google isn't liable to pay corporate income taxes on those sales. Only countries and territories where Google has incorporated and established a so-called physical presence are allowed to collect taxes from the company.
"Especially for the tech giants, they can basically make profits from a country without physically being present, even if they are physically present," Abdul Muheet Chowdhary, senior program officer on international tax at the intergovernmental South Center think tank, told Law360.
The OECD, whose members are mostly wealthy economies, has said countries and territories lose about $240 billion each year collectively from corporate tax avoidance, which it calls base erosion and profit shifting. The 54-government South Center's members, like the G-24's, include developing countries that said they support the deal, along with ones that do not.
"Silence must not be taken as consent or assent," the South Center told the OECD in response to a recent consultation.
Digital companies Netflix, Spotify and Snapchat have openly urged the federal government to lead U.S. resistance against any digital services taxes.
The OECD said its Task Force on the Digital Economy will finish writing the multilateral treaty soon so a high-level signing ceremony can be organized by mid-2022.
Already, the U.S. Department of the Treasury endorsed a plan for the federal government to cede a share of taxing rights to foreign nations on 25% of profits above a 10% margin earned by multinational corporations with global sales above €20 billion ($22 billion). However, the OECD has acknowledged that without Congress' support, the plan's most ambitious aims can't be realized.
"We need the U.S. Congress, which is always reluctant to ratify multilateral stuff — in particular, in tax — to ratify," said Pascal Saint-Amans, the OECD's top tax official, during a virtual conference Nov. 4. Typically, that process takes approval from two-thirds of the U.S. Senate plus the president.
In exchange for ceding the taxing rights, negotiators from Treasury secured political support from about 130 foreign governments for a broad prohibition on new digital services taxes "or other relevant similar measures" on "any company" until the treaty enters into force. That prohibition expires Dec. 31, 2023.
The United Kingdom, France, Italy, Spain, Austria and Turkey all told the U.S. they would repeal existing unilateral measures while implementing Pillar One, a "compromise" to stall U.S. trade actions regarding the taxes, according to a news release by Treasury.
Logan Wort, the African Tax Administration Forum's executive secretary, told Law360 he's advocating against the possibility the U.S. will move forward with previously threatened sanctions on countries that don't give up revenue-raising DSTs.
"Half of Africa is not a member of the inclusive framework," said Wort, whose organization trains African tax officials. Wort is an official observer to OECD discussions designed to bring nonmembers into the fold on corporate tax reform.
G-24 members Nigeria, Kenya, Pakistan and Sri Lanka all declined to support the deal as part of the OECD and Group of 20 nations' inclusive framework on base erosion and profit shifting, where they remain members. ATAF's board includes Kenya's top revenue official.
"ATAF is concerned that if these countries or others ... do not ultimately sign and ratify the [multilateral convention], they may face sanctions such as trade sanctions from the U.S. and possibly other countries if they were to introduce a DST or similar unilateral measure," Wort said. "ATAF strongly advocates that such countries should not be put under political pressure nor face any sanctions if they do not join the agreement and wish to introduce such unilateral measures, as this should be a sovereign decision."
The current and former U.S. presidential administrations have both characterized DSTs as unfairly targeting American companies. Developing countries have characterized them as countermeasures on American companies unfairly eroding their tax bases.
"This is the ultimate question: developing countries want to get the money, but will developed countries give the money?" Chowdhary said.
"From what I've heard, the number of ratifications needed for [the multilateral treaty] on Pillar One to take effect will be close to the OECD membership, so 35 or 36," Chowdhary told Law360.
The OECD has 38 full member states. The group hasn't said how many countries will need to ratify the treaty it hopes governments will sign this year for its provisions to become effective.
Saint-Amans' comments on U.S. reluctance hint at the fact that the White House and Senate have withdrawn from at least nine major multilateral treaties in less than three decades. Several were on topics far less controversial than ceding taxing rights to foreign countries, such as protecting biodiversity and people with disabilities.
"Now would be a great time for more countries to have digital taxes and at least develop a negotiating position where the bare minimum that you have to get from Pillar One is what the best designed digital tax would get you," Matti Kohonen, director at the Financial Transparency Coalition, told Law360.
Otherwise, he said, developing countries are essentially setting themselves up to lose tax revenue immediately on the uncertain promise of a replacement sometime in the future.
"It's actually more likely that the EU might at some point threaten sanctions given that the EU is going ahead, despite the U.S. not going ahead," Kohonen said, adding that individual member states would be the ones to levy any potential sanctions.
The European Commission, the European Union's executive arm, "has always viewed both pillars as complementary, and we remain of that view," an EU official told Law360. "We aim for implementing both pillars, and both pillars are equally important to us."
The official said a directive on Pillar One "could only be put forward once the work at the OECD level is mature enough" and so "a proposal for a directive has been announced" for July. That aligns with the OECD's goal to finish drafting the multilateral convention by mid-2022.
"We should avoid negative spillovers by allowing a delay in agreeing one pillar to affect progress on the other. We should not wait for Pillar One to start discussions on Pillar Two, otherwise the timely transposition of the two pillars will become impossible for national parliaments and the implementation by 2023 as globally agreed will not be respected," the official said.
On Feb. 8, EU finance minister Paolo Gentiloni said transposing the deal into the bloc's law was among the executive branch's top priorities in the coming months. On March 7, a Brussels-based official told Law360 the EU is likely to fall back on DSTs if the U.S. fails to ratify the new international tax norms through domestic legislation.
While Pillar One hinges on a multilateral treaty requiring a supermajority in the U.S. Senate, the deal's Pillar Two contains plans to enforce a 15% rate on corporations worldwide based largely on laws the U.S. already has in place.
"The global minimum tax I think is, on balance, good for developing countries, and probably good for aggressive tax competition," Uy said. "An important view from many developing countries was the rate could have been greater than 15 percent."
The minimum tax would impact global companies with revenue above €750 million ($846 million) for at least two out of four years once it's implemented, according to a draft published Dec. 20.
Former President Donald Trump's administration made a large stride toward combating corporate tax avoidance by introducing a regime known as global intangible low-taxed income, or GILTI, within the 2017 Tax Cuts and Jobs Act . By December 2019, the OECD had published its own version of GILTI, calling it the global anti-base erosion proposal, or Pillar Two, which it described as having "a similar purpose and overlapping scope."
The GILTI system imposes a 10.5% minimum tax on U.S.-headquartered corporations regardless of where they attributed profits — half the 21% statutory business rate set by the TCJA.
Shortly after President Joe Biden took office, Treasury voiced enthusiasm for a multilateral solution to end "a race to the bottom" in corporate rates at the OECD. The department emphasized that its own proposal for a 15% minimum corporate tax rate was a "floor" and that "discussions should continue to be ambitious and push that rate higher."
The U.S. told the inclusive framework's top decision-making body it favored "shrinking" Pillar One to cover only the 100 largest multinational companies. The scope was eventually narrowed from covering companies with €750 million in global sales to €20 billion, the profitability margin was hiked to reflect the U.S.' aims, and finance companies were explicitly carved out.
The OECD agreed to exclude extractives like coal mining and oil drilling as well, saying the carveout would appease developing countries whose economies require fossil fuels under current circumstances to mobilize resources domestically, thus avoiding a reliance on foreign aid.
It's unclear what countries get in return for giving up DSTs — working solutions to the problems the deal hopes to solve — beyond certain rules part-and-parcel to Pillar One's proper functioning, which may or may not favor them depending on details not yet publicly finalized, the organizations' officials told Law360.
Republican U.S. senators have have lambasted Treasury Secretary Janet Yellen for signing the deal before the OECD published a detailed revenue analysis. Even one senator in the right position of power can unilaterally block all tax treaties, as Sen. Rand Paul, R-Ky., did from 2011 to 2019.
Yellen told Congress in October that there were "a number of ways" Congress could implement Pillar One and that the treaty ratification process "would be one way," but hasn't answered further questions.
Paul said he was concerned about privacy involved with data sharing with other countries. A major component of Pillar One's plan involves asking corporations and governments to share data extensively to source revenue.
"We were really wanting to see more analysis of distributional impact of revenues so that countries would be quite clear as to what they were getting themselves into," Uy said, echoing a concern the senators raised to Yellen.
While four poorer nations with large populations dropped support last fall, three of the inclusive framework deal's most vocal opponents — Ireland, Hungary and Estonia — joined at the last minute. The Irish finance minister explained that he held out to ensure the proposals were not a floor, but a ceiling.
The G-24, ATAF and South Center have all advocated at various points for the deal to cover more companies and redistribute more taxing rights. They all said they stand ready to help countries that do and do not implement the global tax deal. The OECD has recently ramped up efforts to train tax officials on BEPS issues.
Considering the current terms represent a deeply compromised position for so-called market jurisdictions, the groups have made clear this basket of international tax changes whose fate is in the hands of the U.S. Congress isn't one into which they're willing to put all their eggs.
OECD tax officials did not respond to a request for comment.
A U.S. Treasury negotiator did not respond to a request for comment.
--Additional reporting by Todd Buell, Natalie Olivo, Matt Thompson, Dylan Moroses and Alex Lawson. Editing by Aaron Pelc and Roy LeBlanc.
For a reprint of this article, please contact email@example.com.