Delay Of OECD Deal Acknowledges Project's Vast Scope

The apparent delay of the two-pronged international tax deal agreed to last year under the auspices of the Organization for Economic Cooperation and Development is both a recognition of the reality of vast changes and a relief for businesses.

The previous timeline, under which a minimum tax and a reallocation of taxing rights would enter into force next year, was simply too ambitious, specialists told Law360.

"I've always thought that it would take many years to implement this, and the timeline that was set out last fall was too aggressive," said Daniel Bunn of the Tax Foundation in Washington, D.C. He told Law360 that from the point of view of writing the appropriate laws and getting companies to comply, delays to implementation "are more a reflection of reality than the original timeline," he said.

Followers of tax policy were jolted last month when the head of the OECD, Mathias Cormann, told the World Economic Forum in Davos, Switzerland, that implementation of what the group calls Pillar One of the deal wouldn't happen until 2024. Pillar One involves the reallocation of some taxing rights of the world's largest companies to countries where they make sales but lack a physical presence. It applies only to companies with global turnover above €20 billion ($21.4 billion).

Pillar Two refers to a minimum tax of 15% on corporate profits for a broader group of companies: those with global turnover above €750 million.

Both pillars were supposed to enter into force next year but have faced delays. Pillar Two is simpler to put in place, as it doesn't require changes to international treaties, and is further along in the legislative process. Nevertheless, it has faced unexpected roadblocks.

Implementation of the minimum tax in the United States has been stymied by gridlock in the Senate, while legislation in the European Union has been blocked by Poland, which wants a stronger link to Pillar One. Several EU officials told Law360 on Tuesday they are optimistic that agreement can be reached in time for a meeting of finance ministers June 17 or shortly thereafter, but that's not guaranteed.

Observers have speculated that Poland's real concern is access to pandemic relief funds the EU has held up over concern about respect for the rule of law in the country. The European Commission recently opened the door for Poland to receive these funds, though the EU and Poland have both said the funding issue is unrelated to the minimum tax.

If Poland is genuinely concerned about a linkage between the two pillars, then Cormann's announcement of a delay to Pillar One could be a legitimate reason to slow down the Pillar Two process.

"There are still countries that are very attached to it [Pillar One], and there are a lot of strong feelings that for the whole thing to be worth doing, they ought to be getting money out of big companies who are targets of Pillar One," said Rebecca Christie of the Brussels think tank Bruegel.

Global implementation of Pillar One is perhaps more challenging than Pillar Two because it requires changes to international treaties, which will likely be hard to achieve in the U.S. Senate, where a two-thirds majority is required.

"I don't think the votes are there," said Bunn of the Tax Foundation.

This has led some to believe that the decision to put off Pillar One until 2024 is merely a recognition that lawmakers in the U.S. aren't ready to accept that part of the deal.

"If the U.S. Congress were to consider the Pillar One rules now, there is a high risk it wouldn't agree. So, the current delay looks like an alternative to U.S. rejection," said Tove Maria Ryding of the European Network on Debt and Development, or Eurodad, in Brussels.

In the EU, negotiators have already proposed delaying the implementation of the minimum tax from the beginning of 2023 to the end of that year, essentially 2024, to give companies and lawmakers more time.

Those close to the companies and businesses that are affected by the minimum tax say they welcome its postponement.

"It's a relief for businesses to have this delay," said Nathalie Aymé of Deloitte in Paris.

"Pillar Two will hit a lot of businesses, and a delay is a relief because one of the difficult parts of Pillar Two is the data gathering and crunching," she told Law360. "Pillar Two relies on data that businesses aren't used to gathering, neither for consolidated accounts nor for tax filing."

Businesses were very concerned about implementation in 2023 in part because of this extra layer of data, she said.

Given that the OECD is still presenting explanations of rules, Aymé added, 2024 is already an ambitious target.

"It would come as a relief if there was an official announcement that Pillar One would be postponed until 2025," she said. "From a technical perspective, there's nothing preventing Pillar Two from beginning in 2024."

To critics of the OECD-led deal, the slowdown reveals limitations and short-sightedness of the accord.

"The deal was sold as a global deal, but it was never global in that it didn't include one-third of the world's countries. And now it looks like even OECD countries are hesitating," said Ryding from Eurodad.

"With such a reluctant and half-hearted implementation, these rules aren't going to be the global tax system of the future. It's not going to be globally implemented and it's questionable what will be implemented by OECD countries, so it doesn't seem that important anymore," she told Law360.

She said the deal lacks the needed "fundamental reform" to the global corporate tax system.

"What that means is that the tax scandals and examples of multinationals gaming rules are going to continue," Ryding said. "That means that political momentum for changing the tax system will be back on the table before long."

The OECD didn't have an immediate response to a request for comment.

--Editing by Aaron Pelc and Neil Cohen.

Update: This article has been updated with a comment from European officials regarding Poland's blocking of legislation on the EU minimum tax.

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