A collapse of global tax talks could cost $100 billion, OECD says

The global economy could shed more than 1 percent of output if international talks to rewrite cross-border tax rules break down and trigger a trade war, the OECD said yesterday, after countries agreed to keep up negotiating to mid-2021.

Nearly 140 countries agreed on Friday to extend talks after the coronavirus pandemic outbreak and United States hesitation before the presidential election squashed hopes of reaching a deal this year.

Talks have been laboring on under the Paris-based Organization for Economic Cooperation and Development auspices for the past two years on how to ensure that tech giants pay a fair share of taxes in the countries where they operate, even if their headquarters are elsewhere.

Public pressure is growing on big, profitable multinationals to pay their share under international tax rules after the COVID-19 pandemic strained national budgets, the countries said in an agreed statement.

The aim is to update international tax rules for the age of digital commerce, in particular to deter big Internet firms like Google, Facebook and Amazon from booking profits in low-tax countries like Ireland regardless where their clients are.

In the absence of a new global rulebook, a growing number of governments are planning their own digital services taxes, which has prompted threats of trade retaliation from the Trump administration.

Several European countries, including France and Britain, have already announced their own levies in the absence of a global accord.

“In the ‘worst-case’ scenario, these disputes could reduce global GDP by more than 1 percent,” the OECD estimated in an impact assessment.

Inversely, new rules for digital taxation and a proposed global minimum tax would increase global corporate income tax worldwide 1.9 percent to 3.2 percent, or about US$50 billion to US$80 billion per year.

That could reach US$100 billion when including an existing US minimum tax on overseas profits, amounting to 4 percent of global corporate income tax, the OECD said. Meanwhile, any drag on global growth would be no more than 0.1 percent in the long term.

While countries agreed on OECD blueprints for a future deal, the key remaining issue to be solved was the scope of businesses to be covered, which would then make it easier to agree the technical parameters, OECD head of tax Pascal Saint-Amans said.

The OECD plan addresses two issues — how to effectively tax firms in every country where they operate, and how to ensure that each country gets a fair portion of their taxes.

An accord would likely set a minimum base tax, potentially of 12.5 percent, that would apply to every company no matter where it is based or declares its income.

Blueprints for both “pillars” will now be published to serve as a basis for further talks, the OECD said, and will be presented to an online meeting of G20 finance ministers tomorrow.

Yet even if a global framework is agreed, it remains uncertain if governments will enact a plan that effectively requires them to give up a degree of their fiscal sovereignty.

Oversight of the new system could also prove tricky, since formulas still need to be agreed on which share of profits should be taxed where — a potential administrative nightmare for companies.