The Organisation for Economic Cooperation and Development (OECD) has warned that a failure to reach agreement on how multinational technology companies should be taxed could knock more than 1% a year off global economic output.

It said this could happen under a worst-case scenario in which countries unilaterally imposed their own taxes on digital services, triggering damaging tax and trade disputes.

The warning came in an update on pandemic-delayed international negotiations aimed at finding a long-term agreement on the tax challenges arising from the digitalisation of the economy.

Minister for Finance Paschal Donohoe warned earlier this year that Ireland would have to prepare for changes to the international tax system, which could affect the country’s corporation tax take.

'Compelling' 

The OECD said the international community had made “substantial progress” towards reaching a consensus and had agreed to keep working towards an agreement by mid-2021.

“The current context of the COVID-19 pandemic makes the need for a solution even more compelling than when it was first considered,” the organisation said in a statement.

It said governments had increased spending on healthcare and provided unprecedented levels of financial support to businesses and workers. “However, the time will come when governments will need to focus on putting their finances back on a fair and sustainable footing,” the OECD added.

Two-pillar approach

It said the OECD/G20 Inclusive Framework on BEPS, which includes 137 countries and jurisdictions, had agreed at its most recent meeting that a ‘two-pillar' approach provides a solid foundation for a future agreement.

The participants have backed the public release of a new blueprint for the first pillar of the project, which would establish new rules on where tax should be paid and a new way of sharing taxing rights between countries.

“The aim is ensure that digitally-intensive or consumer-facing multinational enterprises pay taxes where they conduct sustained and significant business, even when they do not have a physical presence, as is currently required under existing tax rules,” the OECD said.

The second pillar would introduce a global minimum tax that would help countries around the world address remaining issues linked to profit shifting by multinationals.

A study estimates that the proposals contained in both pillars could raise $100 billion a year each if implemented.

Growing risk

“Without a global, consensus-based solution, the risk of further uncoordinated, unilateral measures is real, and growing by the day,” said OECD Secretary-General Angel Gurría (pictured).

“It is imperative that we take this work across the finish line," he added. "Failure would risk tax wars turning into trade wars at a time when the global economy is already suffering enormously.”