The Organization for Economic Cooperation and Development (OECD) has proposed to rewrite international tax rules which could shed more than 1% of output and trigger a trade war. The proposed global tax overhaul would make digital companies pay their fair share of tax in countries where they do business, rather than where they register subsidiaries. This could boost national income tax revenues by a total of $50 to $100 billion a year, the OECD estimates.

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Failure to agree on global digital tax reforms could cost $100 billion, OECD warns

The OECD warns that countries need to agree on a future deal over digital tax reforms or risk hurting the global GDP.
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Global watchdog OECD proposes digital tax reforms and minimum global corporate tax. Failure to agree on a future deal could hurt the global GDP.

The Organization for Economic Cooperation and Development (OECD) has proposed to rewrite international tax rules which could shed more than 1% of output and trigger a trade war. The proposed global digital tax overhaul would make digital companies pay their fair share of tax in countries where they do business, rather than where they register subsidiaries. This could boost national income tax revenues by a total of $50 to $100 billion a year, the OECD estimates.

Profitable multinationals use various schemes to avoid paying taxes in countries where they make vast revenues. According to research by Miroslav Palanský and Petr Janský, more than $420 billion in corporate profits shifted out of 79 countries every year.

More than 140 nations have agreed on OECD’s reform plan which would put an end to such practices. The blueprints for a future deal will be discussed by G20 finance ministers next week, German Finance Minister Olaf Scholz said on Friday.

OECD Global Tax Reforms

05 march 2020: Angel Gurria at Opening Global Forum in Environment
OECD Headquarters, Paris
Photo : © HervŽ Cortinat / OECD

“With a unanimous agreement on a blueprint for reforming the global corporate tax code we have taken a major step forward,” Scholz said in a statement. “This is a positive signal and I’m sure that by the summer of next year we will be able to reach a final agreement on this reform plan.”

OECD’s digital tax plan would discourage tech bigwigs like Apple, Amazon, Google and Facebook from indulging in tax avoidance schemes in low-tax havens like Ireland.

Failure to reach a global deal could prompt some nations to plan their own digital services taxes. However, this should remain unavoidable as it could spark threats of trade retaliation from governments around the world. But fear is mounting due to the coronavirus recession in industrialized nations which may paralyze OECD’s plan of reaching a deal among more than 140 countries this year.

The tax overhaul proposal will be presented by Angel Gurria, OECD Secretary-General, and Pascal Saint-Amans, director of the OECD Center for Tax Policy and Administration, and will also be webcast live.

The meeting is expected to address the outcome of a plenary meeting of the Inclusive Framework on BEPS, slated for October 8 – 9. This Inclusive Framework is a coalition of 140 countries led by the OECD. Documents referring to the proposed tax reform will be available today on OECD’s official website.

OCED tax reform will address two major issues (also known as pillars): 1.) how to effectively tax companies in every country where they operate, and 2.) how to make sure that each country gets a fair portion of a multinational’s taxes. These two major pillars will be presented to an online meeting of G20 finance ministers on Wednesday.

"The glass is half full: the package is nearly ready but there is still no political accord," said Pascal Saint-Amans, head of tax policy at the Paris-based Organisation for Economic Cooperation and Development (OECD).

An agreement would set a minimum base of 12.5 percent which would apply to every firm in the Inclusive Framework.

A few questions yet remain to be answered. There is no clarity on whether governments will need to give up their fiscal sovereignty if they agree to the accord. There’s also the administrative nightmare of setting up a new system wherein formulas will need to be agreed upon on factors such as share of profits, etc.

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