Why the fate of a global taxing-rights deal hangs in the balance

PARIS: Plans to reallocate more of the taxing rights on the biggest, most profitable multinationals to the countries where their consumers are is lurching closer to collapse as a global deal proves elusive after months of talks.

A new international treaty divvying up taxing rights on the 100 biggest multinationals is supposed to form the first of a two-pillar revision of the rules for cross-border corporate taxation to reflect the rise of big digital companies.

The second pillar is an agreement to tax big international companies no less than 15 per cent, which is gradually going live this year as countries adapt their tax codes.

WHAT IS THE STATE OF PLAY?

Officials from 127 countries and jurisdictions had aimed to agree on the terms of the new multilateral treaty by the end of June in order to sign it as soon as possible.The treaty is supposed to allow about $200 billion of corporate profits to be taxed in the countries where the mostly US-based digital companies do business.

It is also supposed to replace a patchwork of digital service taxes that many countries have adopted over concerns big internet groups were booking profits earned off their consumers in low-tax countries.

However, efforts to finalise terms have floundered on US “red-line” issues related to transfer pricing and the ‘Amount B’ system for simplifying the calculation of transfer pricing.

US Treasury Secretary Janet Yellen has blamed India for holding out on the transfer-pricing issue, and said China has been “all but absent” in the negotiations to finalize the deal.

WHAT HAPPENS NEXT?

In the absence of an agreement, a standstill deal on national digital services taxes could expire at the end of June, potentially reigniting trade tensions between the US and some European allies.

Austria, Britain, France, Italy and Spain had agreed to freeze their digital service taxes while work was under way on the treaty and in exchange, the US agreed to back off from a retaliatory tariff threat.

Even if in the best scenario countries are able to agree and sign a text, there is little chance it will be quickly ratified by a critical mass of countries required to go live.

As home to most of the companies considered to be in-scope, the US must ratify the treaty for it to take effect, but that is unlikely with the two-thirds Senate majority all but impossible before the Nov 5 US elections.

WHAT ARE THE POSSIBLE OUTCOMES FURTHER OUT?

One way that the deal could yet come together is if the US manages to include the treaty’s ratification as part of a broader bipartisan overhaul of the US tax code due next year when 2017 tax cuts under former president Donald Trump expire.