Corporate Tax

Yellen removes the impediment to a worldwide corporate tax treaty

WASHINGTON – The US has dropped a demand by the Trump administration in global corporate tax negotiations, removing an obstacle to an agreement to adapt the tax system to the digital economy.

Treasury Secretary Janet Yellen said Friday that the US would no longer insist on a “safe haven” under which some elements of tax regulations would be optional. The idea, proposed by its predecessor Steven Mnuchin in late 2019, met with objections from European colleagues, although discussions about how it would work were never very advanced.

Ms. Yellen spoke at a virtual meeting on the funding of ministers of the group of 20 industrialized and emerging countries. According to a Treasury Department official, Ms. Yellen said the U.S. would continue to participate in both parts of the tax project led by the Organization for Economic Co-operation and Development: an effort to redefine where corporate income is taxed and a parallel effort to impose a minimum of taxes.

Ms. Yellen’s decision does not guarantee that an agreement will be reached. Global conversations have been developing rapidly for years, fueled by the frustrations of European countries towards US tech companies like Facebook Inc.

and alphabet Inc.

have such a large presence in their economies but pay relatively little corporate taxes.

Corporate profits are taxed where value is created, not where customers are. The negotiators have tried to give countries where international companies operate more tax powers. In the absence of an agreement, some have imposed taxes on digital services that are levied on the revenues of companies from these countries.

European governments have shown little willingness to withdraw these levies, arguing that the surge in profits posted by digital services companies during the pandemic underscores the need for a new tax approach. Many believe that the pandemic accelerated the digitization of the global economy and would deprive them of tax revenues needed to fix their finances once the pandemic is contained.

Without a deal, tech companies are said to face a confusing array of national taxes based on slightly different methods of calculating profits – and the possibility that profits could be taxed multiple times. Some of these taxes on digital services are already in place, for example in France.

“It would be a big mistake if there were only national solutions,” said Federal Finance Minister Olaf Scholz at a meeting of the 137 countries that were looking for a deal at their last meeting at the end of last month.

US officials – both Republicans and Democrats – have opposed these unilateral taxes, calling them discriminatory and unfair. The Trump administration reciprocated with tariffs that have not yet come into force. The US sees a global agreement as a way to remove these taxes.

Large US tech companies have also spoken out against the patchwork of one-off national taxes on digital services that they claim are unfairly directed against them. You have called on governments to sign an agreement with the OECD, the Paris-based group of advanced economies.

“We are optimistic that we can reach consensus on global tax reform for the digital age this year,” said Christian Borggreen, vice president and head of the Brussels office at the Computer & Communications Industry Association, which represents companies like Amazon.com Inc.

and Facebook. Mr Borggreen said Ms. Yellen’s comments were encouraging.

The OECD is leading the negotiations between a group of 139 countries known as the Inclusive Framework. Your self-imposed deadline for finding an international agreement is June. The original deadline, which was late 2020, was extended when the pandemic broke out.

Mr Mnuchin proposed the Safe Harbor idea in December 2019, suggesting that an optional system would be easier to accept for both Congress and U.S. corporations. Ms. Yellen had said little about the Biden government’s views on these issues until Friday.

Benjamin Angel, a senior tax officer with the European Commission, wrote in a tweet that Ms. Yellen’s announcement was “an important step” in securing an agreement. “A fresh impetus and a real chance to make it!” He wrote.

Write to Richard Rubin at richard.rubin@wsj.com and Paul Hannon at paul.hannon@wsj.com

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