A deal for a global minimum tax rate that could impact the Virgin Islands’ financial services industry is facing roadblocks in the United States and Europe, according to news reports.

The proposal — a two-pillar solution from the Organisation for Economic Cooperation and Development/G20 Inclusive Framework on Base Erosion and Profit Shifting — was endorsed last fall by most OECD jurisdictions, including the VI.

Pillar One aims to ensure a fairer distribution of profits and taxing rights among countries, while Pillar Two — the one most relevant to the VI — “seeks to put a floor on tax competition on corporate income tax through the introduction of a global minimum corporate tax rate that countries can use to protect their tax bases,” according to a BVI Finance press release.

The agreement sought to end the so-called “race to the bottom” to attract multinational corporations, including tech behemoths like Amazon and Facebook.

Under the deal, the world’s largest companies would have less incentive to shift, or claim to shift, to low-tax locations such as Ireland or the Netherlands, since their profits would be taxed at a minimum rate no matter where they choose to locate.

Efforts abroad

However, legislators in both the US and Europe are now struggling to pass the laws needed to comply with the deal.

President Joe Biden introduced the plan to the G7 in May of last year, and remarks from his administration indicate that it remains a priority.

In May, during a speech at the Brussels Economic Forum, US Treasury Secretary Janet Yellen said the European Union and US “must show leadership by expeditiously implementing the global minimum tax in our domestic laws.”

However, in the US Senate, Democrats are squabbling over spending proposals that accompany the tax bill. The US already charges 10.5 percent on “global intangible low-taxed income,” with some exceptions.

To align with the OECD efforts, Democrats have proposed raising the GILTI rate to around 15 percent and charging it on a country-by-country basis. However, Republicans are not expected to vote for the bill, and so every Senate Democrat likely would have to vote for it.

Though the legislation has stalled for now, Democrats say they still hope to pass the spending bill by September.

As for the plan’s prospects in Europe, “I think it is not hopeless,” Ms. Yellen said during her speech in May. “It is certainly possible that will happen.”

The following month, testifying before Congress’ two tax-writing panels, she said she expected the European deal to go through despite early opposition from Poland.

European plan

However, European efforts have faced major setbacks as well after an initial swell of support.

In October, Ireland agreed to drop its 12.5 percent tax for large multinationals, representing a major victory for the plan, after the country initially rejected the proposed rate of “at least” 15 percent, Reuters reported.

Poland also initially opposed the deal, only to switch its stance as the deadline approached last month.

But also last month, Hungary vetoed an EU agreement to implement the measure, citing concerns about economic damage to a European economy already hurting from the Russia-Ukraine war, Reuters reported at the time.

However, the last-minute veto spurred the US to cancel a 1979 tax treaty with Hungary. A Treasury spokesperson told Reuters that since Hungary lowered its corporate tax rate to nine percent, the tax treaty benefits with the US were no longer reciprocal.

Since then, the Hungarian parliament has refused to budge on the measure, with its parliamentary economic affairs panel on Monday reiterating the ruling, and Reuters cited two diplomats saying a deal was now “unlikely,” with equally dim prospects globally.

VI situation

Last year, some experts speculated that the global tax agreement would pose an existential threat to the financial services industry in this territory and other offshore centres.

However, a panel convened in August by BVI Finance joined a different chorus of voices.

Panellists pointed out that the agreement doesn’t force countries to impose a global minimum corporate tax rate, though it allows them to do so without facing legal action in the International Court of Justice or from the World Trade Organisation.

“Jurisdictions do not have to increase their tax rates to the global minimum: There is only a right for home countries to impose a top-up tax in relation to multinational enterprises operating in other countries with lower taxes,” CEO Elise Donovan stated at the time. “However, it does not mean that a country can impose a top up tax for each jurisdiction that an MNE is active in.”

Furthermore, the proposals are not all-encompassing. Companies with less than a threshold of 750 million euros’ worth of turnover would not be affected, and countries do not have a right to impose a top-up tax against these businesses.

“It is clear that there is much more detail yet to come on how these proposals will be implemented,” Ms. Donovan said at the time.

“The BVI will monitor developments closely and will continue to provide clear insights to our clients, members and stakeholders.”