Pillar 1 was a hot topic at the sidelines of the recent G7. US Treasury Secretary Janet Yellen is striving to save a critical part of the global corporate tax deal focused on highly profitable multinational firms. However, the negotiations are encountering significant resistance from key players.

KEY OBSTACLES IN NEGOTIATIONS, AS PER US REPRESENTATIVES

India's Non-engagement

• India is refusing to engage on issues crucial to US interests.
• This lack of cooperation is creating a major roadblock in the finalization of "Pillar 1" of the OECD corporate tax deal, initially agreed upon in 2021 by 140 countries.

China's Absence

• China has been "all but absent" in the negotiations, further complicating the process.

ACTIVE NEGOTIATION EFFORTS

Commitment to the Deal

• Attending G7 finance leaders meeting in Italy, US representatives emphasized the US's commitment to meeting the end-June deadline for the deal. "

Pillar 1 Objectives

• The primary aim of Pillar 1 is to reallocate taxing rights on US-based digital giants, allowing about $200 billion of corporate profits to be taxed in the countries where the companies operate.

CHALLENGES AND POTENTIAL CONSEQUENCES

Italian Finance Minister's Concerns

• Italian Finance Minister Giancarlo Giorgetti expressed skepticism about the success of the Pillar 1 negotiations, citing objections from the US, India, and China.

Pillar 2: Global Minimum Tax

• A second pillar of the tax deal, the 15% global minimum tax on corporate profits, is being implemented by many countries. However, the US Congress has not ratified it.

US Red Line Issues

• The US has two critical issues: transfer pricing and the "Amount B" system for simplifying transfer pricing calculations. While most countries support the US position, India's refusal to engage remains a significant hurdle.

Potential Return of Digital Services Taxes

• A collapse of the Pillar 1 negotiations could lead to the return of digital services taxes in some countries, potentially reigniting trade tensions.

HISTORICAL CONTEXT AND FUTURE IMPLICATIONS

Past Trade Tensions

• Prior to the 2021 initial deal, US trade authorities had threatened 25% tariffs on over $2 billion worth of imports from countries including Italy, Austria, Britain, France, Spain, and Turkey. These tariffs were put on hold after countries agreed to suspend their digital taxes while details of the arrangement were worked out.

Italy's Position

• Italy is seeking to negotiate an agreement with Washington to prevent these tariffs, which are temporarily frozen until June, while maintaining its levy. This negotiation aims to ensure a stable and fair taxation environment for multinational firms.

Sources/ Recommended read:

• Yellen says India and China hindering 'Pillar 1' tax deal | Reuters