18 July 2023
The international tax system has come under increasing scrutiny in recent years. Many more companies now operate in more than one country and digital business models mean it is easier to sell and deliver goods or services from a distance. As governments seek to attract this kind of multinational business through lower tax rates, this has, in some cases, led to a ‘race to the bottom’ which leaves multinational enterprises paying lower levels of tax than domestic competitors.
Although many national governments have legislated to address this; the results have led to a wide range of different solutions. To resolve this, the Organisation for Economic Co-operation and Development (OECD) has been working with a growing number of countries – now around 140 – to agree a single set of rules to restore confidence in the international tax system.
One of the OECD’s main proposals, known as Pillar 2, aims to ensure that the largest multinationals pay corporate income tax at a rate of at least 15% in the territories where they operate. This is complex – the calculation needs around 150 pieces of data for each company – but intends to be a global set of rules. The OECD has provided model rules and guidance, but it is up to individual governments to implement the rules. In practice, every country adopts these into tax legislation in their own way – HMRC, for example, recently issued 166 pages of draft guidance notes and on 18 July published a draft of its proposed next stage of legislation.
The businesses falling within the rules will seek to be compliant and have a keen eye for their wider reputations as good corporate citizens. However, in most cases, the additional tax that will be due is expected to be comparatively small as the majority of major operating territories either have tax rates above 15% already or are changing their domestic rules in response to Pillar 2.
Although the tax yield is often small (in some cases, nil), the information required for the return may be extremely onerous and expensive to collect. It is disappointing that there is not more correlation between the amounts large businesses will need to spend and the additional tax collected.
Meanwhile, boards of multinational entities grapple with the changing tax landscape. In a recent major tax conference, 73% of leading in-house tax practitioners said that their group’s board of directors did not understand the new regime and the implications for the business. To an extent this is understandable given the complexity of the implementation, but it is disappointing that after such an extended consultation, the international consensus reached on low tax regimes is so complex and onerous.
The international tax system has clearly moved on and needs to remain dynamic to keep up with the pace of business change. It also needs to be consistent and understandable, as gaps and complexity open holes for tax planning and reduce public trust in the system. While the OECD’s intentions are widely supported, there is a question whether this has been fully achieved by the Pillar 2 roll out. If anything, more consistency is required, which means less freedom for each country to interpret the rules. To achieve confidence in the international tax system, would individual countries be willing to give up more of this freedom and let the OECD – or someone like them – write the rules in full?