Global tax negotiators fear watering down of proposals

Convincing holdout nations may result in too many compromises

Geneva: tax havens and investment hubs are cautious about the proposed deal.

Geneva: tax havens and investment hubs are cautious about the proposed deal.

 

Negotiators in Paris are battling to persuade holdout nations to sign up to a global deal on corporate taxation this week as they become increasingly concerned that the compromises needed to get countries on board will water down the final agreement.

China, India, eastern European countries and developing nations have all raised objections to the deal struck by the G7 group of leading economies this month. The talks at the OECD are seeking to find carve-outs to bring them on board.The details of the proposals will be discussed by finance ministers from the G20 group of countries at a summit in Venice next month.

Sources say that a range of issues are proving challenging to reach agreement on, including the proposed minimum global tax rate, a special carve-out to give countries flexibility in this area, how financial services might be treated and how the reallocation of profits is dealt with under the plan on altered taxing rights.

Minister for Finance Paschal Donohoe has said he is in favour of a deal, but that Ireland has concerns about aspects of the proposals agreed by the G7 countries, including the proposed minimum corporate tax rate of at least 15 per cent. The State’s current corporate tax rate is 12.5 per cent. Ireland will be closely watching the negotiations in the run up to next week’s G20 ministerial meeting, where wider agreement will be sought on the key principles.

Deal

Those with knowledge of the process have become more hopeful about getting a deal, and especially about China agreeing to participate, but warned that time was short.

One negotiator said: “I think it will not fail . . . there are still some uncertainties, but we are not far from a deal.”

Another person close to the negotiations, who last week had been worried about China’s involvement, said signs were now more positive but warned the talks could be the final chance to get a global agreement that would stop decades of disputes about the global tax regime.

The European official said: “If we can’t get an agreement at the G20 then the chances are that we’ll have to start over for another 20 years of talks on this issue.”

He said there was a risk of diluting the deal so much that it became meaningless and flagged the high stakes involved: “If we can get a deal then it’ll be a big win that shows that international diplomacy on the biggest issues is possible.”

A third official said China was still the main sticking point but there was more optimism among negotiators than a few weeks ago.

China and many eastern European countries complain that the deal would disrupt existing tax arrangements which offer manufacturers investment incentives through corporation tax to build factories and machinery by having an effective tax rate lower than the proposed global minimum of 15 per cent.

None of these countries are considered tax havens, in which multinationals channel footloose profits to take advantage of low tax rates. Eastern European nations have won an exemption for manufacturing factories, sources said.

Benefit

Negotiators are seeking to ensure that China could also benefit from this, but it has not been made clear whether the world’s second-largest economy would agree to the wider deal in exchange. “No one really knows what the Chinese position is,” the European official said. “They are playing for time and are leaving all their options open.”

Developing countries are unhappy that the deal will not let them raise more tax from the largest multinationals, and that they will get the right to tax only a small proportion of companies’ profits based on sales.

The G24 group of poor developing countries has asked for a much larger share of profits to be covered by the deal and have threatened to persist with their own digital taxes.

They have been offered a compromise in which the threshold for companies covered by the global arrangement would be lowered from $20 billion (€16.7 billion) of turnover to $10 billion after seven years. If they reject this, “it would be a lost opportunity for them”, said one person representing advanced economies.

Developing countries also want to increase the proposed global minimum tax rate of “at least 15 per cent”.

In an online conference on Monday Mathew Gbonjubola, Nigeria’s ambassador to the OECD, said setting the global minimum at that level “would not do much to benefit countries in Africa” and was “likely to continually promote [tax] base erosion from African countries”.

But when asked whether developing countries were likely to turn down the deal, Gbonjubola said “political pressures” made that a difficult decision. “Each jurisdiction needs to state clearly whether it is for what it is on the table or against it and there’s no third option,” he said. – Copyright The Financial Times Limited 2021 (Additional reporting: Cliff Taylor)