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Yellen says India and China hindering 'Pillar 1' tax deal

G7 Finance Minister and Central Bank Governors' Meeting in Stresa

By David Lawder

STRESA, Italy (Reuters) - U.S. Treasury Secretary Janet Yellen said on Friday she is trying to save a part of the global corporate tax deal focused on highly profitable multinational firms, but India is refusing to engage on issues important to U.S. interests.

Yellen told Reuters in an interview on the sidelines of a G7 finance leaders meeting in Italy that China also has been "all but absent" in the negotiations to finalize "Pillar 1" of the OECD corporate tax deal reached in principle in 2021 that involves 140 countries.

"We are actively engaged in this negotiation," to meet an end-June deadline for the deal, Yellen said. "We're committed to doing everything we possibly can to make it work."

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Earlier on Friday, Italian Finance Minister Giancarlo Giorgetti told reporters that the Pillar 1 negotiations were set to fail, citing objections from the U.S., India and China.

The Pillar 1 negotiations are mainly aimed at reallocating the taxing right on U.S.-based digital giants, allowing about $200 billion of corporate profits to be taxed in the countries where the companies do business.

A second pillar of the tax deal, the 15% global minimum tax on corporate profits is separately being implemented by many countries, but the U.S. Congress has not ratified it.

Yellen said there are two "red line" issues for the U.S. in the talks, related to transfer pricing and the "Amount B" system for simplifying the calculation of transfer pricing.

While most countries support the U.S. position on these issues, "we have a problem with India. India will not engage with us," she said.

A collapse of the Pillar 1 negotiations could prompt the return of digital services taxes in some countries and reignite potential trade tensions.

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

Italy wants to negotiate an agreement with Washington that would stop these tariffs, which are temporarily frozen until June, while also keeping its levy in place, an Italian official told Reuters on Friday.

(Reporting by David Lawder; Editing by Alistair Bell)