The implementation of a global tax agreement that was hailed as a “revolution” for the profits of multinational IT businesses has been delayed until at least 2024 due to a thicket of technical issues.
Negotiators had set next year as the timeframe for the new system to go into effect, but work on a legislative instrument to amend tax treaties around the world has been more difficult than anticipated.
Although Cormann had previously warned of potential delays, the announcement of a new schedule represents yet another setback for a global agreement intended to address the pervasive cross-border profit shifting that is estimated to cost governments between $100 billion and $240 billion in tax revenue annually.
These are complex and very technical negotiations in relation to some new concepts that fundamentally reform international tax arrangements, OECD Secretary-General Mathias Cormann said Monday. We will keep working as quickly as possible to get this work finalized, but we will also take as much time as necessary to get the rules right.
There is also more uncertainty: The overhaul is still not supported by all Democrats in the US Congress, and there is organized Republican resistance.
Failure to put into effect new regulations that would grant foreign governments more taxing authority over companies like Facebook’s parent company Meta Platforms Inc. and Amazon.com Inc. ultimately runs the risk of reigniting the transatlantic trade conflict over digital levies that first surfaced under Donald Trump’s administration.
As long as the OECD’s international agreement is put into effect by December 31, 2023, European countries and the US have agreed to suspend their tit-for-tat policies. If the new international regulations are not in place by the end of next year, Canada has also passed legislation that would implement a national digital tax retroactive to January 1.
The Group of 20 finance ministers will convene in Indonesia later this week, and the Paris-based OECD, which facilitates tax talks between roughly 140 nations, said it will now provide a draft of regulations to that gathering. By the middle of 2023, a system to amend international treaties must be finalized in order to go into effect in 2024.
The effect of the transfer on US tax collection will be keenly anticipated by members of Congress.
The deal will have a small net impact, according to the Treasury’s current assessment. Lawmakers and foreign corporations with US operations will also be on the lookout for hints about how it would impact their financial results.
There is confusion around Pillar Two, which would establish a minimum corporation tax, in addition to Pillar One, the portion of the worldwide agreement that deals with where companies are taxed. After Hungary lost its support, the European Union was unable to win the requisite unanimous approval of its member states.
A 43-year-old tax agreement with Hungary will be terminated, the Treasury Department announced last week, emphasizing the significance of the changes for the US administration.
The minimum levy’s technical work is “largely complete,” according to the OECD, and the majority of the world’s leading economies have already set implementation dates.