Global Tax Overhaul Gains Steam as G20 Backs New Levies

VENICE — Global leaders on Saturday agreed to move ahead with what would be the most significant overhaul of the international tax system in decades, with finance ministers from the world’s 20 largest economies backing a proposal that would crack down on tax havens and impose new levies on large, profitable multinational companies.

If enacted, the plan could reshape the global economy, altering where corporations choose to operate, who gets to tax them and the incentives that nations offer to lure investment. But major details remain to be worked out ahead of an October deadline to finalize the agreement and resistance is mounting from businesses, which could soon face higher tax bills, as well as from small, but pivotal, low-tax countries such as Ireland, which would see their economic models turned upside down.

After spending the weekend huddled in the halls of an ancient Venetian naval shipyard, the top economic officials from the Group of 20 nations agreed to forge ahead. They formally threw their support behind a proposal for a global minimum tax of at least 15 percent that each country would adopt and new rules that would require large global businesses, including technology giants like Amazon and Facebook, to pay taxes in countries where their goods or services are sold, even if they have no physical presence there.

“After many years of discussions and building on the progress made last year, we have achieved a historic agreement on a more stable and fairer international tax architecture,” the finance ministers said in a joint statement, or communiqué, at the conclusion of the meetings.

The approach marks a reversal of years of economic policies that embraced low taxes as a way for countries to attract investment and fuel growth. Instead, countries are coalescing around the view that they must fund infrastructure, public goods and prepare for future pandemics with more fiscal firepower at their disposal, prompting a global hunt for revenue.

“I see this deal as being something that’s good for all of us, because as everyone knows, for decades now, the world community, including the United States, we’ve been participating in this self-defeating international tax competition,” Treasury Secretary Janet L. Yellen said on the sidelines of the G20 summit. “I’m really hopeful that with the growing consensus that we’re on a path to a tax regime that will be fair for all of our citizens.”

The agreement followed a joint statement last week that was signed by 130 countries who expressed support for a conceptual framework that has been the subject of negotiations at the Paris-based Organization for Economic Cooperation and Development for the better part of the last decade. The O.E.C.D. estimates that the proposal would raise an additional $150 billion of global tax revenue per year and move taxing rights of over $100 billion in profits to different countries.

The backing of the broad framework by the finance ministers on Saturday represented a critical step forward, but officials acknowledged that the hardest part lies ahead as they try to finalize an agreement by the time the leaders of the Group of 20 nations meet in Rome in October.

Among the biggest hurdles is an ongoing reluctance by low-tax jurisdictions like Ireland, Hungary and Estonia, which have refused to sign on to the pact, potentially dooming the type of overhaul that Ms. Yellen and others envision. Hungary and Estonia have raised concerns that joining the agreement might violate European Union law and Ireland, which has a tax rate of 12.5 percent, fears that it will upend its economic model, siphoning the foreign investment that has powered its economy.

Absent unanimous approval among the members of the European Union, an accord would stall. Establishing a minimum tax would require an E.U. directive, and directives require backing by all 28 countries in the union. Ireland had previously hinted that they would object to or block a directive and Hungary could prove to be an even bigger hurdle given its fraught relationship with the union, which has pressed Hungary on unrelated rule-of-law and corruption issues.

Prime Minister Viktor Orban of Hungary has stated that taxes are a sovereign issue and recently called a proposed global minimum corporate tax “absurd.” Hungary’s low corporate rate of 9 percent has helped it lure major European manufacturers, especially German carmakers including Mercedes and Audi.

Bruno Le Maire, France’s finance minister, said on Saturday that it was important that all of Europe supports the proposal. G20 countries plan to meet with Ireland, Hungary and Estonia next week to try and address their concerns, he said.

“We will discuss the point next week with the three countries that still have some doubts,” he said. “I really think the impetus given by the G20 countries is clearly a decisive one and that this breakthrough should gather all European nations together.”

Policymakers also have yet to determine the exact rate that companies will pay, with the United States and France pushing to go above 15 percent, and negotiations are continuing over which firms will be subject to the tax and who will be excluded. The framework currently exempts financial services firms and extractive industries such as oil and gas, a carve-out that tax experts have suggested could open a big loophole as companies try to redefine themselves to meet the requirements for exemptions.

Domestic politics could also pose hurdles for the countries that have agreed to join but need to turn that commitment into law, including in the United States, where Republican lawmakers have signaled their disapproval, saying the plan would hurt American firms. Big business interests are also warily eyeing the pact and suggesting they plan to fight anything that puts American companies at a disadvantage.

“The most important thing is understanding that if there is going to be an agreement, that there cannot be an agreement that is punitive toward U.S. companies,” said Neil Bradley, the chief policy officer at the U.S. Chamber of Commerce. “And that, of course, is of great concern.”

A report this month from the European Network for Economic and Fiscal Policy Research found that only 78 companies are expected to be affected by the overhaul but nearly two-thirds of them are American. The researchers estimated that the new taxes would raise $87 billion in revenue and that Apple, Microsoft, Alphabet, Intel, and Facebook would pay $28 billion of that total.

At the heart of the proposal is the idea that, if countries all agree to a minimum tax, it will prevent businesses from seeking out low-tax jurisdictions for their headquarters, depriving their home countries of revenue. Ms. Yellen has criticized what she calls a “race to the bottom” in global taxation, saying it has hurt the ability of nations around the world to pay for critical services and help their populations during moments of crisis, such as the pandemic.

Ms. Yellen said that she would be working in the coming months to address the concerns of countries with reservations but that the deal could still proceed even if some countries did not join. She pointed to an enforcement mechanism that would raise U.S. taxes on corporations that have headquarters in countries that continue to be tax havens but do business in America.

Still, changing domestic tax laws will not be quick or easy, including in the United States, whose success in ushering in a new tax regime is being closely watched as a harbinger of whether a global overhaul can actually succeed. Senior officials at the G20 meetings said that approval of the agreement within the United States was crucial to its broader acceptance and should not be taken for granted.

Republican lawmakers have suggested they will put up a fight.

Representative Kevin Brady of Texas, the top Republican on the House Ways and Means Committee who was one of the architects of the 2017 tax cuts, said that the Biden administration’s tax proposals would never pass.

“Certainly in Congress there’s a great deal of skepticism,” Mr. Brady said in a telephone interview this week. “My prediction is that at the end of the day, even if an agreement is reached, what the president will bring back to Congress is an agreement that advantages foreign companies and workers over American ones.”

Ms. Yellen indicated that Democrats were prepared to pass as many of the tax changes as they can through a budgetary procedure called reconciliation that would alleviate the need for Republican votes. She assured her international counterparts that the Biden administration was ready to deliver its end of the bargain and pushed back against the idea that the new tax system would harm American workers.

“For the United States, it’s going to be a fundamental shift in how we choose to compete in the world economy,” Ms. Yellen said. “Not a competition based on rock-bottom tax rates, but rather on the skills of our work force, our ability to innovate and our fundamental talents.”

Policymakers continue to grapple with what the global minimum tax rate will be and what exactly will be subject to the tax. Their current proposal calls for a tax on the largest and most profitable multinational enterprises, those with profit margins of at least 10 percent. They want to apply the tax to at least 20 percent of profit exceeding that 10 percent margin for those companies, but continue to debate how the proceeds would be divided among countries around the world. Developing economies are pushing to ensure that they will get their fair share.

Mr. Bradley, of the Chamber, said that the details of a final agreement would determine how punitive it would be for companies. Representatives from Google and Facebook have been in touch with senior Treasury officials as the process has played out.

American businesses are also worried about being put at a disadvantage by a 21 percent tax that President Biden has proposed on their overseas profits, if their foreign competitors are only paying 15 percent. The Biden administration also wants to raise the domestic corporate tax rate from 21 percent to 28 percent. Democrats in Congress are moving forward with legislation to make those changes to the tax code this year.

“If a U.S. company is trying to compete globally with a significantly higher tax burden because of this significantly higher minimum tax on its operations, that’s a competitive issue for being able to be successful,” said Barbara Angus, a global tax policy leader at Ernst & Young.

She also said that there continued to be great uncertainty about how the agreement would be enforced internationally.

Washington and Europe also remain at odds over how to tax digital giants like Google and Amazon. The Biden administration has pushed European countries, like France, to withdraw their national taxes on U.S. digital companies in exchange for striking a broader deal for an overhaul of the global tax regime.

Yet Brussels is now said to be seeking a 0.3 percent tax on the goods and services sold online by all companies operating in the European Union with an annual sales of at least 50 million euros — a position that is unacceptable to U.S. negotiators.

At the G20 summit, finance ministers expressed optimism that such obstacles could be overcome. In his closing news conference after the deal was reached, Daniele Franco, Italy’s finance minister, hailed the agreement as historic and called on the countries that have yet to join to reconsider.

“To accept global rules is, for each country, difficult. Each country has to be prepared to compromise,” Mr. Franco said. “To have worldwide rules for taxing multinationals, for taxing the profits of big companies is a major change, is a major achievement.”

Liz Alderman contributed reporting from Paris, and Eshe Nelson from London.

Source: Read Full Article