Global Tax Reform Isn’t Yet a Done Deal

Dublin also could have blocked European Union implementation of the deal—any change to the bloc’s tax rules requires unanimous approval. Other EU holdouts, Hungary and Estonia, may extract some concessions, but are now expected to fall in line.

The Biden administration has been a key advocate of the agreement, and has worked hard and twisted a few arms to get one. But the required tax changes are mostly tucked into the White House’s contentious $3.5 trillion spending bill. While legislating new U.S. tax rules was never going to be easy, the obstacles seem to have grown in recent weeks and failure could feasibly trip up the global overhaul.

Getting here has taken years. The final agreement will be similar to the preliminary one agreed to in July, but it will get into the thornier issues glossed over in the summer accord. The reform makes two big changes. First, it creates a global minimum corporate tax. Second, it will tax the world’s largest companies slightly differently: A percentage of their profits will be taxed based on where they make sales rather than where they have assets such as factories, employees or patents. Currently asset location determines taxing rights.

Three points of disagreement have been worked through over the summer. First, the minimum tax rate is expected to be 15%. Prior drafts said at least 15%, but Dublin pushed hard for this change—its longstanding rate is 12.5%.

Second, about a quarter of residual profits will likely be taxed using sales rather than assets. French officials said earlier this week there was broad backing for that rate, although some developing nations wanted a higher percentage. They may have compromised in exchange for avoiding arbitration to resolve disputes, which many worried could disadvantage them or impinge their sovereignty.

Third, Washington’s pet issue: the rollback of digital service taxes (DSTs). Countries around the globe have used DSTs to target U.S. tech giants that pay little or no local corporate tax on profits made locally. Governments also intended DSTs to bring the U.S. to the negotiating table—which they eventually did—and many promised to reverse them once global reform was done. Washington wants DSTs removed now that a deal is agreed, but others prefer to wait until tax rules are updated. These two dates could be years apart.

Recent drafts included implementation of the deal by sometime in 2023. With Dublin on board, the timing seems ambitious but possible for Europe. Mr. Biden’s path seems less certain. The final agreement on when to roll back the DSTs will offer a useful indication of how confident Europeans and Americans are that this reform is a done deal.

Write to Rochelle Toplensky at [email protected]