How the US got the upper hand in the OECD tax reform proposals

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV Media network.

The Paris chateau hosting OECD. [Website of the Permanent Representation of Austria to the OECD]

One of the more intriguing aspects of the negotiations on the OECD proposals to reform international corporate tax rules, which come up for decision this month, is the role played by the Biden administration, writes Dick Roche.

Dick Roche is a former Fianna Fáil politician. He was the minister of state for European affairs when Ireland conducted the two referendums on the Treaty of Lisbon of the European Union in 2008 and 2009.

The Obama administration was ambivalent on the initial OECD proposals.  Under Trump, ambivalence turned to hostility. In 2020 when warring politicians in Washington could agree on little else, Democrat and Republican Senators came together to oppose the direction of travel in the OECD discussions. They were particularly animated about the idea of European digital service taxes (DETs): the Trump administration had already threatened retaliatory tariffs on countries adopting DSTs.

All changed in April.  The Biden administration revised the US position indicating it would accept a deal that applied to a limited range of enterprises, set a global minimum tax rate – it aimed for 21% but settled for the formulation “at least 15%” – and provided that digital service tax proposals be dropped when the new rules came into operation.

The OECD outgoing SecGen hailed the change as providing a “once in a lifetime” opportunity to address global tax abuse. The enthusiasm was catching, it seduced many to overlook the shortcomings and ambiguities in the draft agreement. By the end of June, over 130 countries and territories signed off on the revised proposals.

The first section of the proposals, Pillar One, establishes the principle that profits shall be taxed where economic activities take place and value is created. However, application of the principle will be limited. It will apply only to multinational enterprises (MNEs) with a global turnover of over €20 billion and profitability above 10%.  This high threshold means that only around 100 of the world’s largest multinationals will be captured by the change.  In these cases, between 20-30% of “residual profit” –  profit in excess of 10% of revenue –  will be allocated to countries where the companies do business.

The profitability floor raises another issue.  Unless adjusted, the agreement will exclude Amazon, the fifth richest company in the world.

Pillar One also provides for the exclusion of extractive industries, regulated financial services, and shipping.

Setting shipping, an industry which has always been treated as unique, aside, giving a free pass to oil, gas, and mining, industries with an inglorious history in exploitation, environmental degradation, corruption, and Olympian records in profit shifting and tax dodging can only be described as bizarre, particularly so on the eve of COP 26

Exclusion of the ‘extractive sector’ is excused on the basis that the sector is outside the automated digital services area and not consumer-facing. Tax dodging is tax dodging, whether customer-facing or non-digital.

Another, more cynical, excuse is that the oil, gas, and mining industries provide opportunities for developing economies.  This ignores the long history of corruption by major extractive sector players.  It also ignores contemporary evidence that companies in the sector are every bit as adept as the digital service giants when it comes to avoiding paying taxes.

The justification for excluding banking and financial services – that the sector is “highly regulated”- is equally questionable. The  Luxleaks, Swissleaks, and Panama Papers scandals demonstrate that, highly regulated or not, banks and financial services play an integral role in global tax avoidance. A report released by the EU Tax Observatory released in September demonstrates that banking is no stranger to the benefits of profit shifting and tax avoidance.

While the Pillar One objectives are unquestionably positive, the exclusions and carve-outs undermine its good intentions.

Pillar Two aims “to put a floor on competition on corporate income tax”.  This is achieved through a global minimum corporate income tax rate of “ at least 15%” applied to any MNE with over €750 million in annual revenue.

The issues raised by Pillar Two are more fundamental than those that arise under Pillar One. The commitment to a minimum corporate income tax rate of  “at least 15%” is imprecise,  open-ended, and undermines the principle of certainty in law.

More importantly, it trespasses on a fundamental issue: what is taxed and how much tax is to be charged goes to the heart of state sovereignty. Shifting responsibility for determining taxes from national politicians who are answerable to the electorate to unelected tax administrators who operate behind closed doors is a step backwards.

There is a third issue: the minimum rate applies only to MNE’s with over €750 million in annual revenue. As drafted, this means that different tax rates could be applied to MNEs below the threshold.

There is one final point, the issue of incentives in national taxation systems that drive base erosion and profit shifting has been largely ignored. As mentioned previously in EURACTIV over the last 70 years, US lawmakers have constructed a taxation system with avoidance baked into it, often in direct response to the corporate lobbies that fund US politics.   For decades US corporations have been incentivised to delay paying US taxes by holding profits offshore, contributing to the global problems that the BEPS project was aimed to cure. There is nothing in the agreement to prevent this process from continuing.

In Washington, the draft agreement is seen as a “hands down” win for the United States. It is hard to contest that view. The US largely fulfilled its negotiating objectives. Its requirement that only a minimal number of MNEs will be within the scope of Pillar One is met.  The commitment to a minimum corporate income tax rate, while not the 21% that the Biden administration sought, is sufficiently imprecise to allow for future upward adjustment. European digital service tax proposals opposed by the US will be abandoned when the agreement comes into effect.

In contrast, EU member states signing up for the agreement relinquish their right to introduce digital taxes. They also compromise the sovereignty of EU member states on taxation in a way that would be rejected if put forward as an EU treaty change. Unless amended, the Pillar Two proposal for a tax rate of “at least 15%” undermines the principle of certainty in law.

If the draft is agreed this month, the race is by no means over. Implementation will require action at the individual state level. The big stumbling block in that process may well be the US Congress.  President Biden boasted that “American vision” got the draft agreement over the line in June.  Whether the same “vision” will apply when arrangements reach the US Congress is another matter.

Subscribe to our newsletters