For eight long years since 2013, the G20 and the OECD have been working on their base erosion and profit-shifting (BEPS) project to set up an international framework to combat what they saw as tax avoidance by multinational corporations. During that period, calls for greater transparency and responsibility in taxation have increased but, despite substantial efforts by the OECD, definitive progress in creating the new international framework has remained elusive.
All that has now changed. The 5 June 2021 political agreement between the G7 finance ministers offers the prospect of an end to these delays. Chairing the meeting, UK Chancellor of the Exchequer Rishi Sunak said, ‘These seismic tax reforms are something the UK has been pushing for and a huge prize for the British taxpayer – creating a fairer tax system fit for the 21st century.’
The political agreement has two key elements. First, the largest and most profitable multinationals will be required to pay tax in the countries where they operate and not just where they have their headquarters. The rules will apply to global firms with at least a 10 per cent profit margin. 20 per cent of any profit above the 10 per cent margin would be reallocated and then taxed in their market countries. The 10 per cent threshold and 20 per cent limitation may prove attractive in securing support from the USA. The risk, of course, is that arbitrary thresholds will trigger behaviours by companies which in turn will be countered by complex rules which have to be implemented.
Second, a global minimum company tax rate of at least 15 per cent will be operated on a country-by-country basis, so creating a more level playing field. The country-by-country basis is particularly important; otherwise, companies could use tax havens to offset higher rates elsewhere.
Of course, this is not the end of the matter. G20 backing for these proposals will be sought at their meeting in July 2021. On the basis that backing is forthcoming, the OECD will then be tasked with developing the practical details for a framework which is simultaneously enormously significant and hugely complex. The OECD estimates that these two elements – which they call ‘pillars’, a term whose implication always leaves me slightly apprehensive: if one pillar fails then the entire edifice comes tumbling down – could increase the global tax take by between $50 billion and $80 billion per year. That figure could be larger, considerably larger perhaps, if the global minimum company tax rate is increased above 15 per cent to unequivocally end the worldwide company tax rate ‘race to the bottom’.
With treasuries worldwide more cash-strapped than at any time in the last 60 years, countries will be positioning themselves to secure the biggest slice of this enlarged cake. Further difficult negotiations and compromises are therefore inevitable.
Indeed, concerns are already beginning to emerge. It has been pointed out that, while finance ministers of the G7 may have reached an agreement whose benefits are clear to their own nations, compromise will be required to secure the necessary commitment of the G20. And then there’s the situation of developing countries, whose voices the OECD has quite rightly been keen to hear among the 135 nations working on the BEPS project.
Do these proposals signal the end for international tax havens? Maybe. Fewer will be keen to hear the dissenting voices of tax havens, although the G7 are anticipating that a flood of tax haven profits will be taxed. This implies that tax havens will not be able to impose local taxes equal to the worldwide minimum rate. If that’s correct, then there is likely to be substantial future scrutiny over the mechanisms used to transfer profits to tax havens.
While Mr Sunak’s glowing statement, primarily directed perhaps at a domestic audience, does not mention the tax havens among the country’s Crown Dependencies and Overseas Territories, the UK is not alone in this regard. The USA and many other global powers have down the centuries raised their flags over territories which are now tax havens so there may well be political and economic consequence and amendments to these proposals. Another interesting dynamic in this saga will be the reaction and impact on the traditionally low company tax jurisdictions, some of these being within the EU, for example Ireland.
Whereas the previous US administration stepped back from a number of key global bodies, with the Biden administration it is clear that the USA is back and keen to see progress. This comes with its own difficulties.
At a time when the BEPS project appeared to be languishing, a number of countries including the UK, Italy, Spain, Turkey, India and Austria introduced their own digital sales taxes. By way of keeping these nations focused on the new global tax framework, the USA has threatened them with 25 per cent tariffs on $2 billion of imports. Although these tariffs have been suspended for six months to allow time to progress the negotiations, the US is separately threatening tariffs on $1.3 billion of French imports. As many of these countries have already committed to repeal their own digital taxes once a global agreement has been reached, the symbolism of these weaponised tariffs is not lost on close observers of what is happening: in overseas markets, the USA remains keen to protect its tech giants from local taxes.
Once the new global framework is in place, a modest seepage of taxes under Pillar One or Pillar Two will be more than compensated for by increased tax collections for the US Internal Revenue Service.