01 February 2022
Should there be a global minimum rate of corporation tax and, if so, what should that rate be?
After more than two years of negotiations, the nations of the world signed up to an agreement to solve what some see as one of the biggest issues facing us. At times it seemed hardly possible, but in the nick of time the political landscape shifted and with smiles all round a deal was announced at last year’s G7. The answer was 15 percent, thereby launching the global minimum tax with just a page or so of a framework document in support. The hundreds of pages of detail out of which it was born were temporarily forgotten.
The model rules, published on 20 December 2021, flesh out that detail but the guidance and some further rules missed the deadline. These are expected before March 2022.
Architects of future global collaboration may study the finer arts deployed by the OECD in bringing the 140 nations of the Inclusive Framework together on this project – it is no mean feat. However, is this a good blueprint for developing tax policy? Collaboration is surely desirable. But at times it has felt that our attention has been channelled to selected details rather than the overall design.
Aside from the 15 per cent minimum tax rate, the mantra is “tax or let someone else tax”. In essence, to the extent a country taxes a subsidiary in a multinational group at an effective rate less than 15 per cent, the country of the group parent will pick up taxing rights (there are welcome carve outs, the main one being an exemption for groups with revenues of less than €750m). This may be what overcame US reluctance along with some other major economies. The intention is to lock all the consenting Inclusive Framework countries (including all the main tax havens) into a set of rules. Its design is reminiscent of blockchain; other peoples’ copies of the law hold you to the rules if you seek change or divergence.
The OECD will not conduct any further public consultations on the rules, but the UK government has now launched its own consultation. This stresses how important it is that the new rules are implemented uniformly, although the need for seventy pages of discussion signals that might be ambitious. Experience of EU directives being implemented by each member state in their own way serve as a guide or a warning.
The UK consultation points out that disputes may arise from uneven implementation, or where the rules leave room for different interpretations. More generally it should be anticipated that there will be differences, because of the almost dispiriting level of complexity in the proposals and because countries have diverse reasons and histories for writing their domestic tax laws the way they are. However, there is no existing legal framework for dispute resolution, so one will have to be created.
Whereas EU treaties require tax measures to have the approval of all member states, having first passed scrutiny and revision by various democratic bodies, the Inclusive Framework has mandated change affecting half of the world’s countries and the vast majority of the global economy through a working party created by a cooperation agreement. But what is the mechanism for reform once the working party has ceased to exist? Few tax laws remain fit for purpose over the long term.
Countries may increase their domestic tax rates to ensure they tax local profits, rather than surrender taxing rights to other jurisdictions. The UK government includes this in the consultation. Should we be surprised if some tax havens with tiny populations, or more oil-rich Middle Eastern states with no previous need for tax revenues, follow the UAE’s lead and do likewise? Is this really what the OECD intended?
These complex rules, with many questionable elements, exist to fix the issues remaining after BEPS. Yet if those issues remain because of uneven implementation, will the result be different this time? Is acceding to something that may well yield an imperfect outcome but with unprecedented permanence really the best way?