- OECD opines that if a mutual consensus is not reached on the issue of international digital tax regulation, the global economic output could shrink by 1%.
- ~140 countries are deliberating on this decision and have delayed discussions till next year.
- Many countries have expressed dissent with regards to tech giants misusing the lower tax offered by them.
- Countries like France and the UK have already adopted their digital service tax to be charged from such corporations.
- President Donald Trump has threatened to retaliate if countries impose independent digital tax collection rules.
OECD, on 12 October 2020, stated that the global economy could witness a loss of 1% in total output if international tax talks do not take shape immediately. In June 2020, when the US pulled out of global digital tax talks, there were increased concerns regarding the establishment of a mutual ground on the same.
Countries have agreed to negotiate till 2021, creating instability surrounding the revisions to the tax rulebook. OECD also suspects that there could be rising tensions which could trigger a heated trade war much like the one experienced between the US and China.
Against the current backdrop of a pandemic, the threat of a trade war could worsen the situation of already suffering economies.
Why Is A Tax Reform A Need Of The Hour?
Amending international tax rules has been on the agenda of various countries to incorporate digital commerce supervision into these rules. In a globalised world where big companies can profit by running operations in countries offering lower tax rates, while their customers are elsewhere, securitising digital tax collection becomes essential.
However, the need for these reforms has led to many countries adopting their tax rulebook, which has not been taken well by the US. Reportedly, President Donald Trump has even threatened to retaliate if countries impose their own digital tax collection rules.
Consequently, several countries are opting out of discussions regarding these tax reforms. Decisions about the same have been delayed until next year.
Proposed Blueprints By OECD
The OECD proposed blueprint reports which included Pillar One and Pillar Two reforms. Stakeholders are expected to present their view of the blueprint by 14 December 2020.
- Pillar One: The Pillar One reforms are targeted at providing countries with an increased level of authority over the tax charged from multinational companies (MNCs) that hold online operations there. It additionally aims to replace unilateral taxes imposed on non-resident MNCs.
- Pillar Two: The GloBE initiative under Pillar Two aims to implement a global minimum tax to thwart big companies from collectively holding their operations in low-tax countries.
These reforms, if implemented, would change the fundamental structure of international taxes in Canada and many other countries.
Expected Implications Of Reforms
If the US does not implement the Pillar One measures, other countries are likely to continue with local reforms and follow Digital Service Taxes (DSTs) or other unilateral measures. In such case, Canada, for instance, can choose not to adopt Pillar One and shift its focus onto handling DSTs efficiently.
Herein, it should be noted that countries have been considering DST. It was introduced by the UK government, the EU, and many other countries. If implemented, these countries would be able to collect increased taxes from digital tech giants like the FAANGs. Many countries have collectively planned on implementing DSTs.
Besides, a huge problem faced by tax authorities is taxing companies that provide digital services while being physically located in other countries. This could also lead to loopholes in execution.
The tax is applicable to those companies that have digital services and have global sales exceeding USD 500 million. Most of the companies that fulfil these criteria are American, which justify the critical approach taken by President Trump.
Do Countries Have Anything To Lose?
The new rules for digital taxation and a proposed global minimum tax could raise global corporate income tax from ~2% to as high as its double of ~4%. The global tax income could reach up to USD 100 million. Nearly 140 countries have agreed to extend the discussion until 2021. However, the US opted out of the discussion in June 2020.
OECD opines that in the long run, any drag on global growth would not exceed 0.1 %. As the economic damages owing to COVID-19 are being felt across the globe, public pressure is increasing on these MNCs to pay their fair share in taxes.
The initial process of implementation of tax reforms was hampered due to the pandemic. However, countries are currently in a phase where they feel a need to rush this process. Here’s the risk- without a global consensus on the issue, there are high chances of tension increasing worldwide.
Besides, with the US suspecting countries to adopt DSTs and its threat to retaliate implies that tax increases could hurt economies of 140 participant countries. Many European countries, including France and Britain, have already implemented their own levies.
Moreover, if these countries do adopt the tax proposal by OECD, another tricky area for them would be to manage the tax and provide precise calculations that are to be charged. This could be a tiresome task as each country would customise the tax structure to suit itself.
While Pillar One and Pillar Two give participant countries the power to decide how much participation they want from MNCs, it comes with its own set of challenges. Making a one-size-fits-all policy would be hard to accomplish, more so if countries continue down their path of adopting DSTs.
However, it is important to curb the exploitation of low-tax countries by these big corporations. This would require constant regulation and would take some time before a smooth path is achieved.
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