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Global Tax Rewrite Estimated to Raise $100 Billion Heads to G-20

Global Tax Rewrite Estimated to Raise $100 Billion Heads to G-20

The OECD is preparing to ask the Group of 20 finance ministers for an endorsement of its plans for a global tax overhaul estimated to bring in roughly $100 billion annually.

The Organization for Economic Cooperation and Development is trying to get nearly 140 countries to agree to an overhaul of how the digital economy is taxed. The effort seeks to address concerns that multinationals, particularly tech giants, aren’t paying enough tax in the countries where they have users or consumers.

Data released by the OECD Thursday shows that the plan would bring in more tax revenue for most countries, including both low- and high-income countries.

Those estimates could help negotiators convince the G-20 meeting in Riyadh, Saudi Arabia, starting on Feb. 22 to continue backing the OECD-led effort. Countries are aiming to reach agreement by the end of the year.

Negotiators are hoping the OECD plan will discourage countries from pursuing unilateral tax measures aimed at the digital revenue of tech companies like Facebook Inc. and Amazon.com Inc. France agreed to pause collection of its 3% digital services tax, following U.S. trade threats. French officials have said they’ll replace the tax with the OECD’s proposal if the effort is successful.

The $100 billion overall figure is “an estimate based on certain assumptions about the parameters” of the plan, Grace Perez-Navarro, deputy director of the OECD’s Center for Tax Policy and Administration, told Bloomberg Tax Thursday at a Tax Council Policy Institute conference in Washington.

“We still haven’t decided key parameters, and so it’s a little bit hard,” she said. “But I think it will be helpful at the G-20 to persuade them that this is the right way to go.”

Winners and Losers
Although the plan would likely benefit most countries, the exception will be investment hubs -countries with more than 1.5 times as much inbound foreign investment as their gross domestic product- which stand to lose under the plan, according to the OECD data.

It’s unclear how any particular country will fare, as countries continue to negotiate fundamental design elements of the plan.

The OECD plan drew criticism from a coalition of tax justice groups, which said the impact assessment was proof the global rewrite won’t reach far enough.

“As it stands, the reform proposal would fail to meaningfully address tax avoidance by multinationals and deliver minimal redistribution of taxing rights and will only achieve a small fraction of its objectives,” the Independent Commission for the Reform of International Corporate Taxation said in a statement Thursday. The group includes organizations like the Tax Justice Network and Oxfam, and economists Thomas Piketty and Joseph Stiglitz.

The coalition compared the estimated $100 billion gained under the OECD’s plan to the International Monetary Fund’s estimate that $600 billion is lost each year to corporate tax avoidance.

Assessing Impact
Countries agreed Jan. 31 to work on a plan that will include two parts—Pillars One and Two.

Pillar One of the plan would give countries with large consumer markets a greater share of multinationals’ profits. The revenue impact could vary depending on how much profit is reallocated, what share of companies’ profits are targeted, and which companies are affected.

Amount A, the section of Pillar One that reallocates profits, would have the largest impact on a small group of companies. More than half of reallocated profits under Amount A will come from about 100 multinationals, the OECD said.

Pillar Two, a global minimum tax, will offer most of the revenue boost, the OECD said. But which countries it helps most will depend on the design of the plan and the order in which its rules are applied. Key details of Pillar Two are stil being negotiated—including the rate of the minimum tax and how it would be assessed.

The revenue difference between the two pillars might force the business community to think more about Pillar Two’s design and policy basis, said Jeff VanderWolk, a partner at Squire Patton Boggs in Washington.

Decisions Ahead
Countries have agreed to work on reallocation rules in Pillar One that would apply to highly profitable, consumer-facing companies. The OECD rules would exclude industries such as mining and most financial services, while applying to such business models as selling digital goods and services and franchises.

Details of Pillar One that are still being decided could change how countries’ revenues are effected. For example, the data released Thursday showed that investment hubs would lose more, and other countries would gain more, if Amount A applied to profits above a 10% margin, versus a 20% margin.

The OECD said its analysis didn’t take into account the possible impact of a U.S. proposal to make Pillar One a safe harbor, which would allow companies to choose whether the new rules or the current system of taxation would apply to them.
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