Global Tax Reform Isn’t Yet a Done Deal

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Ireland’s backing clears the way for reforms in Europe, but growing uncertainty over Washington’s ability to finish the job

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Dublin could also block the EU’s implementation of the deal – any changes to the bloc’s tax rules require unanimous approval. Other EU holdouts, Hungary and Estonia, may pull out some concessions but are now expected to conform.

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The Biden administration has been a major advocate of the deal, and has worked hard to get it and have folded some arms. But the necessary tax changes are mostly covered in the White House’s controversial $3.5 trillion spending bill. While legislating new US tax rules was never easy, obstacles have risen in recent weeks and failure could potentially trip up a global overhaul.

It took years to get here. The final agreement will be similar to the initial agreement agreed in July, but it will add to the thorny issues embroiled in the summer agreement. The reform makes two big changes. First, it creates a global minimum corporate tax. Second, it would tax the world’s biggest companies a little differently: a percentage of their profits would be taxed based on whether they make sales, not where they have assets such as factories, employees or patents. Presently the location of the property determines the tax authority.

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Three points of disagreement have been worked out over the summer. Firstly, the minimum tax rate is expected to be 15%. An earlier draft said at least 15%, but Dublin worked hard to change this – its long-term rate is 12.5%.

Second, about a quarter of residual gains would be taxed using sales instead of assets. French officials said earlier this week there was widespread support for that rate, although some developing countries wanted a higher percentage. They may have compromised in exchange for avoiding arbitration to settle disputes, which many worried could harm them or affect their sovereignty.

Third, Washington’s pet issue: the rollback of the Digital Service Tax (DST). Countries around the world have used DST to target US tech giants who pay little or no local corporate tax locally. Governments also intended that DST bring America to the negotiating table – which they eventually did – and many promised to reverse them once global reforms took place. Washington wants DST removed now because a deal has been agreed, but others prefer to wait until the tax rules are updated. There may be a difference of years between these two dates.

The most recent draft included the implementation of the deal sometime in 2023. With Dublin, the timing seems ambitious but for Europe it is possible. Mr Biden’s path seems less certain. The final agreement on when to roll back DST will provide a useful indication of how confident Europeans and Americans are that the reform is a deal.

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