Global tax truce frays over fears of US Senate deadlock

Legislative paralysis in Washington is threatening to trigger a global tax war, as countries prepare for the likely failure of a landmark agreement overhauling taxation of big multinationals.

With a self-imposed deadline of June 30, negotiators for more than 140 countries are on the cusp of emerging this week with an OECD-brokered treaty text on taxing digital companies, dubbed ��pillar one” reforms.

This would in effect start the long-delayed process of countries signing and ratifying the deal, which would redistribute about $200bn of annual profits to be taxed in countries where multinationals do business.

But, even before the ratification process begins, several countries including Canada have broken ranks to start introducing unilateral taxes against big technology groups — a step the global deal was designed to avoid.

The concern among diplomats and analysts is that the final package of OECD-backed reforms, first agreed in 2021, will be stillborn because the global deal requires US ratification to come into force, a near impossible challenge in a divided Washington.

The international tax treaty, which is vehemently opposed by Republicans, would require a two-thirds majority in the US Senate to be passed. One person involved in the negotiations said that as a result the deal was “definitely dead”.

“If the US doesn’t ratify it would be a kind of pyrrhic victory,” said Alan McLean, chair of business at the OECD tax committee. “We’d have something but it wouldn’t take effect.”

Countries involved in the talks signed up to a moratorium in 2021 banning digital services taxes while the international negotiation continued. But this agreement is due to terminate at the end of June.

The OECD is preparing to circulate a treaty text ready for signature from Wednesday evening, according to documents seen by the Financial Times.

But to be enacted the deal would need approval by legislatures of at least 30 countries that house the headquarters of at least 60 per cent of the roughly 100 affected companies — a requirement that cannot be met without US participation.

Will Morris, global tax policy leader at PwC, said: “I do think the signing of the treaty, assuming they can get there, will raise expectations that simply can’t be met — both public and political expectations — which is a shame as most of the players know already this is unlikely to happen.”

The failure is expected to reignite a tax war as countries peel away from the global negotiations to apply domestic taxes, despite long-standing threats of retaliation from the US.

Janet Yellen, the US Treasury secretary, has championed the OECD’s global tax reform push, but recently made clear the US would not sign the international treaty without “firm agreement” on mandatory simplification of transfer pricing rules.

Given the challenges, one negotiator said countries were starting “critical discussions” about introducing unilateral digital levies, including taxes based on companies having “significant economic presence” in the country.

Canada last week notably passed legislation on a digital services tax on large businesses. Kenya and New Zealand have also started the process to bring in such taxes — levies that would mostly be felt by large, US-based tech companies.

French finance minister Bruno Le Maire, who played a crucial role in negotiating the deal, said all parties should “not spare our efforts to have this final agreement enter into force”. But he warned last week: “If not, we have a European solution.”

Barbara Angus, EY’s global tax policy leader, said companies had been asking the firm to think through how countries might introduce such levies in order to better prepare for a potentially “chaotic” environment.

Megan Funkhouser of the Information Technology Industry Council, which represents the tech sector, said executives were concerned about seeing a “proliferation of unilateral measures” around the world.

G7 leaders said on June 14 they were “committed” to finalising the work at the OECD by the end of the month.