This summer marks one year since the leaders of the G-20 agreed to endorse a tax deal to eventually implement a global minimum corporate tax rate, which promised to create consistency around the world and fewer opportunities for passed-down costs for startups. But officials around the world are hitting road bumps as they attempt to bring their countries’ policies in line with the deal, making a global framework by the end of 2023 unlikely.
The OECD’s official endorsement followed in October and stipulated that acquiescing countries would drop their discriminatory digital services taxes (DSTs) while Pillars 1 and 2 of the final deal underwent negotiations. In turn, the U.S. would withdraw tariff threats issued in response to the DSTs. The deal, which would also prevent new digital services taxes from being implemented, would allow governments to tax companies based on where their products and services were consumed and would set a global corporate minimum tax rate of 15 percent on overseas profits for multinational companies exceeding 750 million euros in global sales.
Engine has repeatedly argued over the course of negotiations that while DSTs, for the most part, are targeted at large multinational corporations, the effect they could have on startups may be significant. Startups are inherently risky ventures, often with tight budgets and limited resources. And startups often rely on the free or low cost services provided by the mostly American companies that have been targeted by DSTs. Implementing new taxes on these companies will ultimately result in a price increase for such services, ultimately making launching and growing a startup more difficult.
While an agreement on a global tax deal would provide some certainty for U.S.-based startups, in order to execute the framework, each country must first implement it individually through their own legislative processes. And agreeing to final details and implementation is proving to be a slow slog, with some countries continuing to oppose the overall deal and outstanding questions over the ability of U.S. companies to take advantage of long standing in-country tax benefits.
The European Parliament approved a proposal for the global minimum tax, though Poland has indicated concerns about the deal, holding up the policymaking process. Treasury Secretary Yellen hopes to make progress on the deal as she travels in Europe this week, including during a stop in Poland. In meeting with Polish officials, she urged them to allow the process to advance (having already been delayed in Europe a year), signaling it is a priority for the U.S. In other parts of the globe, Kenya, Nigeria, Sri Lanka, and Pakistan—all OECD member countries—continue to oppose the deal, with Kenya citing the need to withdraw its DST as a leading reason. And officials at the OECD have expressed uncertainty that the agreement will come into place within the expected timetable—the end of 2023.
In the U.S., House Democrats were unable to pass a plan to implement the OECD deal through the Build Back Better Act. And with a contentious midterm election approaching and Republicans—who significantly oppose the deal—possibly poised to take the majority in Congress, the outlook for the deal stateside is murky.
One sticking point that emerged late last year is the inclusion in the deal of a “top-up tax” through the Under Taxed Payments or profits Rule (UTPR) which allows countries to collect a top-up tax—amounting to the difference between a company’s effective tax rate and the 15 percent minimum tax—for companies that pay less than the 15 percent effective rate in a country because they benefit from tax credits or deductions. Because the rules treat refundable and nonrefundable tax credits differently, the provision could reduce the incentive for companies to avail themselves of, for example, the R&D tax credit. This appears to be a significant oversight by the Treasury Department, which could have a significant impact on the innovation ecosystem. It is unclear what this would mean for companies that typically avail themselves of the credit, their future R&D endeavors, and how they might deal with the loss of the credit (e.g. potentially needing to raise prices on offered products and services).
Further, Republican policymakers in the U.S. argue that this amounts to an additional tax liability for targeted U.S. companies.” According to Senate Republicans, under this measure “foreign countries could effectively capture the benefit of congressionally-provided tax credits and deductions targeted at domestic innovation, investment, and job creation.” Other countries, like the United Kingdom, were better able to secure protections for their tax laws.
It is unclear if global governments will be able to adopt the framework prior to the 2023 deadline. If they don’t, it is likely that foreign governments will again begin to implement discriminatory DSTs. Indeed, even with the possibility of the framework itself, the looming threat of DSTs remains on the horizon. The Canadian government proposed a three percent DST and signaled its intention to move forward with the tax if the OECD deal is not put in place. More will likely follow should the global deal fall apart.
