New US proposals for reforming the international tax system

The Organisation for Economic Cooperation and Development (OECD) has been working on proposals for addressing the tax challenges of the digitalisation of the economy for a number of years. It hopes that international consensus will be reached by the middle of this year.

"To date one of the main blockers to agreement at the OECD has been the attitude of the US,” said Catherine Robins, a tax expert at Pinsent Masons, the law firm behind Out-Law. “It has opposed measures favoured by European countries which would give those countries a share in the tax revenues from the tech giants".

"The change of attitude from the Biden administration is to be welcomed and makes it much more likely that agreement will be reached on significant changes to the international tax system," she said.

In October 2020 the OECD published 'blueprints' of its proposals. The proposals are divided into two 'pillars'. Pillar one addresses the allocation of taxing rights between jurisdictions and considers proposals for new profit allocation and nexus rules, which would give countries where multinationals have significant numbers of customers taxing rights over a slice of the profits. Pillar two seeks to ensure that multinationals pay a minimum level of tax, regardless of where they are headquartered or the jurisdictions in which they operate.

According to the Financial Times, the US proposals would mean the hundred or so largest international companies paying levies to national governments where they are making sales, regardless of their physical presence in those countries. This would include the big US technology multinationals but would also affect other large multinationals.

Robins said: "The concept of a global minimum tax rate is broadly acceptable to most countries. The controversial part of this proposal is setting the rate at 21%. It is more likely that agreement will be reached at a lower level."

Ireland's headline corporation tax rate is 12.5% and the UK's current rate is 19%, although that is set to rise to 25% from April 2023.

The minimum rate proposal does not mean that countries have to set their rate of tax above the minimum level. If profits are made in a low tax jurisdiction, the country where the group is based will be able to 'top-up' the tax paid to the minimum rate. This is designed to discourage the so called 'race to the bottom' whereby countries compete for international business by setting a low rate of corporate tax.

The slow progress in agreement at the OECD has led to a number of countries, including the UK, France and Italy introducing their own temporary digital sales taxes (DSTs), which tax the revenues of digital companies. The US has threatened tariffs on imports of certain goods from countries which have imposed DSTs as the US sees these as unfairly targeting US owned technology groups.

Pillar one of the OECD proposals is designed to give some taxing rights to countries where a multinational operates, and to address the problem DSTs have been introduced to target.

The US has previously objected to pillar one and favoured pillar two, which addresses its concern that the US is losing tax revenues from US multinationals encouraged to set up operations in low tax jurisdictions such as Ireland. On the other hand, European countries such as France and the UK have opposed the introduction of pillar two without pillar one.

Robins said: "The US proposals acknowledge that European countries in particular are not going to agree to pillar two – which the US really wants – without pillar one, and therefore could break the deadlock in the OECD negotiations. However, we will need to see the detail of the proposals to see whether the digital levy proposal is enough for countries like the UK and France to agree to drop their DSTs."