Key Takeaways
- The OECD’s larger advisory body has urged countries to create a pathway to agreement on digital taxes by the end of the year.
- The debate has been stuck for years following the collapse of “Pillar One,” an agreement made by the Biden Administration.
- The booming AI economy could make the debate even more complicated.
- Italy looks to tax exits.
- Puerto Rico mulls softening blow from minimum tax.
It’s been nearly a year since the Organization for Economic Cooperation and Development finalized details on the Pillar Two global minimum tax “Side-by-Side” agreement with the United States.
With the design details on the ambitious plan finally worked out (in theory), officials from both the U.S. and the OECD vowed at the time to move on to the next challenge—coming up with an agreement on how the global tax system should treat digital transactions. This came amid the Trump administration’s threats to enact retaliatory tariffs against countries with digital-specific levies.
Despite the time that has passed, there’s hardly any indication of progress on these knotty issues. But countries are hoping to add some urgency.
A statement from the OECD’s Inclusive Framework—a 148-jurisdiction advisory body that has been part of the global tax discussions—following its recent plenary session calls on the OECD leadership to release a plan by year-end to “swiftly advance” the digital tax discussions. The wording is somewhat vague, but emphasizes “the importance of continuing discussions to build a common understanding of perceived challenges, examining the evidence in support of those challenges, and considering how challenges relate to current rules.”
If anything, the statement underscores how far apart the different sides are, if they have yet to reach a “common understanding of perceived challenges,” let alone potential solutions. The parties seem to view the issue in fundamentally different ways. The countries that have enacted digital services taxes claim they’re a necessary tweak to deal with gaps in the global income tax system. The U.S. maintains they’re an extraterritorial tax, in violation of international norms, targeting the U.S. tech sector.
Pillar One, a new taxing system to replace DSTs, which the U.S. and the OECD agreed to in 2021, attempted to bridge that gap. But it’s been dead and buried ever since it became clear that the U.S. Senate would not ratify an implementing treaty—and that’s unlikely to change after today’s elections. So far, few ideas have been floated as a potential replacement.
But maybe the biggest factor working against an agreement is the rapidly exploding artificial intelligence industry. Just over the past year, AI and data center construction have transformed the economy, and already the tax system is struggling to keep up. This adds a whole new dimension to debates about how to tax the digital economy and online-only transactions.
As if the debate weren’t already hard enough.
Noteworthy Items This Week
In its draft budget submitted to parliament over the weekend, Meloni’s three-party coalition proposed a 26 per cent tax on paper profits accrued by people who have assets of €800,000 or more and decide to relocate from Italy.
Puerto Rico Bill to Fend Off Global Tax Risks Country Resistance – Lauren Vella, Bloomberg Tax ($):
But whether the plan would survive the scrutiny of other countries that apply the 15% global minimum tax rules is an open question.
The bill, introduced Oct. 15 at the behest of the Puerto Rico Chamber of Commerce, would give companies, most of which are European-owned, cash grants from a fund fed by the same revenue from new tax increases they will have chosen to pay to the government.
The Foreign Tax Credit Balancing Act – Mindy Herzfeld, Tax Notes ($):
This raises the question of the extent to which the U.S. government should be subsidizing foreign governments through a generous foreign tax credit that historically has encouraged U.S. investment overseas, rather than penalizing taxpayers — and countries — when these countries impose higher taxes. Democrats and Republicans frequently take inconsistent positions on these questions — but overall, both parties’ platforms may further erode the U.S. corporate tax base.
Pillar 2 Revenue Enters Debate Over Next Long-Term EU Budget – Sophie Petitjean, Tax Notes ($):
Costa is not ruling out any options to get member states on board with the next EU budget, including funneling some of the revenue from pillar 2 into the EU budget, an EU source speaking on the condition of anonymity told Tax Notes October 30.
The statement confirms October 27 reporting by Politico Europe saying that the idea is being examined as a way to break the deadlock over the proposed financial contribution based on large companies' turnover: the Corporate Resource for Europe, known as CORE.
Financial taxes were seen as some of the likelier options for raising revenue because the Labour Party pledged not to increase income tax, value-added tax or National Insurance in its 2024 manifesto. This budget is the government's first since Prime Minister Andy Burnham took office in July.
Public Domain Superhero of the Week
Every week, a new character from the Golden Age of Comics, who’s fallen out of use.
This week’s entry: Jet Powers
Debut Year: 1950
Debut Publication: Jet #1
Origin Story: No secret identity--he's an inventor, fighter and military technician who works directly for the President.
Superpowers: No superpowers either, but his military tech makes him formidable.
Eide Bailly's International Tax Team and our affiliates at HLB, The Global Advisory and Accounting Network, stand ready to assist with your worldwide tax needs.
