The Organisation for Economic Co-Operation and Development (OECD) has published a new multinational treaty on digital taxation. The global body hopes that if enough countries ratify the treaty it will present a unified front against Big Tech on tax.
This is the first stage in a major overhaul of the rules that govern cross-border taxation of these large companies. The process was agreed in 2021 as a way to handle complex issues like where a company should pay taxes if a service is provided digitally but progress has been slow and complex.
Countries have a mixture of tax systems that allow multinational companies to reduce the tax they pay by placing the majority of their revenue generation in the country with the lowest tax. To solve this some countries have started to introduce digital taxes but this has come with criticism from the US government as the majority of affected companies are American.
The new treaty aims to solve this approach and instruct governments on how to allocate taxation. By presenting a single unified approach to digital taxation it is hoped that the $200bn profits from the largest multinational companies will be more fairly allocated.
The OECD projects that if ratified the unified approach to digital taxation will boost global tax revenue of up to $32bn and the low and middle-income countries will be in a position to gain the most from the change.
US agreement essential for digital tax deal
While the US stands to lose out overall in the change, it is likely preferable over the current system with multiple different approaches, with digital taxes applied in every country US companies operate.
For the treaty to come into force the countries that are home to at least 60% of the multinational companies have to ratify the treaty. This means the US, where companies like Apple, Google and Microsoft are headquartered, has to be on board.
Manal Corwin, head of tax for the OECD, told reporters that failure to ratify the agreement would lead to “grave consequences”. In part because it would trigger a proliferation in the use of digital services taxes and trade retaliation.
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While US President Joe Biden’s administration expressed support for the deal, Congress has shown no interest in ratification. Corwin says not doing so also threatens the broader multinational stability. “In my mind, this threatens the stability of the broader international system that both countries and companies have depended on for a long time,” she warned.
“It doesn’t ultimately mean that we don’t keep moving on finishing the tremendous work that has been done,” the tax expert added. “Ultimately the goal here is to get to ratification – that’s really the end game.”
The second pillar is the introduction of a global minimum level of corporate taxation, set at 15% and due to begin being implemented early next year.
