Despite political obstacles in the United States, tax experts believe that the OECD's proposed 15% minimum tax rate will become a global standard.
"The Biden administration is pushing hard and there is plenty of opposition. I suspect it would be harder to get this through Congress next year than this year if the midterm elections favour the Republicans ," says one tax director at a US financial services firm.
In 2019, the OECD drafted pillars one and two. Pillar one aimed to overhaul international taxing rights in order to address the digital economy, while pillar two aimed to give tax planning a level playing field. The combination of both pillars was designed to alleviate the uncertainty created for taxpayers by unilateral measures.
Pillar two may have a better chance of succeeding than pillar one. "Pillar two will go ahead with or without the US. It’s pillar one that depends on US support for it to work internationally. We may be back to DSTs if it fails, which looks likely ."
The United States backed OECD plans to reverse the rise of digital services taxes (DSTs), which are frequently targeted at US technology companies. In response to base erosion and profit shifting by the high-tech sector, many countries, including France, implemented DSTs.
Businesses should, however, plan for the possibility that tax reforms will be incomplete. Pillar two may be implemented in most countries around the world, but pillar one may not be implemented on the same scale, resulting in a more complicated and uncertain international tax system.
Although the OECD received 137 countries' support for its pillars one and two in October 2021, the reform's success is dependent on the politics of each country, and in some cases, multiple countries.
Pillar two is being implemented by EU leaders across 27 countries. On May 19, the European Parliament will hold a plenary session on the global minimum rate, with the outcome likely to favor tax reform. The issue is that the EU's support for pillar two is still divided.
Despite mounting pressure, Poland's government has yet to agree to a global minimum tax rate. Since Estonia and Hungary withdrew their opposition, Poland is the last remaining EU member state.
When it comes to pillar two, Manal Corwin, the head of KPMG's national tax practice in Washington, DC, believes the EU will have more international clout than the US.
"If the EU directive is successful, I think the rest of the world is going to move with or without the US changes, so my sense is it’s not as concerning to countries as it might have been before."
Meanwhile, there are no signs that the US Congress will approve the tax increase. The Biden administration wanted to build on Trump's tax reform by increasing the corporate rate to 28 percent and the minimum rate to 21 percent, before settling for 15 percent.
Senator Joe Manchin of West Virginia, a Democrat, continues to oppose the Build Back Better (BBB) bill, which includes a plan to raise the minimum tax rate. In February, he declared the BBB bill "dead."
Nonetheless, the Biden administration continues to support the minimum wage both domestically and internationally. Janet Yellen, the US Treasury Secretary, visited Poland to meet with Polish Prime Minister Mateusz Morawiecki and Finance Minister Magdalena Rzeczkowska.
"We strongly believe it’s in the interest of Poland to be part of this, so we’ve had very good, frank discussions," Yellen said after the May 16 meeting in Warsaw.
Rzeczkowska argued for a "legally binding" guarantee that the global tax reform would only affect the top 100 multinational corporations. Such a guarantee, however, would be included in the multilateral convention on pillar one, which has yet to be negotiated.
"We strongly believe that we should be mindful of the inadequacy of placing additional burden on European businesses under pillar two without ensuring the digital giants are fully taxed under pillar one," Rzeczkowska said.
In other words, until pillar one is secured, the Polish government opposes pillar two. The issue is that the two pillars are meant to work together, as a global minimum rate may not work without new profit allocation rules.
Despite the fact that 137 countries have agreed to implement a minimum rate on large businesses, the OECD's plans are far from certain to succeed. The majority of those countries may proceed with pillar two, but the risk is that an incomplete reform will not result in long-term change.
By fLEXI tEAM