FourQ Intercompany Analysis: 130 Countries Sign on to 15% Global Minimum Tax
On the heels of the G7 agreement to establish a global minimum tax rate of 15% for multinational companies, 130 countries representing more than 90% of global gross domestic product have backed the plan. Tax and intercompany financial management teams should watch the evolution of new rules offered by the Organisation for Economic Cooperation and Development (OECD) to guide implementation.
- In an attempt to get multinational companies to pay “fairer tax” and to end the corporate tax “race to the bottom,” a global minimum tax rate of 15% has been backed by 130 countries and jurisdictions.
- At the same time, a new digital tax would target about 100 tech companies that make at least 20 billion euros ($23.7 billion) in revenue. This will require giants like Amazon, Facebook, and other big global businesses to pay taxes in countries where their goods or services are sold, even if they have no physical presence there.
- The Organisation for Economic Cooperation and Development (OECD) announced a two-pillar general outline of new rules that follow the OECD/G20 Inclusive Framework (IF) on Base Erosion and Profit Shifting (BEPS) and provide a roadmap for global tax rate implementation.
- Pillar 1 focuses on where large companies pay tax. It proposes a partial redistribution of tax revenue in which large corporations would pay more taxes in countries where they have customers and less in countries where their headquarters, employees, and operations are located. Pillar 1 also proposes a simpler method for companies to calculate the taxes they owe on foreign operations such as marketing and distribution.
- Pillar 2 talks to how much gets paid. Global anti-Base Erosion Rules (GloBE) outlined in this section include an Income Inclusion Rule (IIR), which imposes a top-up tax, and an Undertaxed Payment Rule (UTPR) which denies deductions or requires adjustments. Also included is a Subject to Tax Rule (STTR) for tax treaties.
- OECD rulemaking must be finished for the Inclusive Framework to be approved. This is anticipated to be finalized by October 2021.
- Final adoption of these rules will require participating countries to write new laws, agree to new tax treaty language, and repeal conflicting policies. For example, the outline specifically states that existing or planned unilateral digital services taxes must be terminated.
- The OECD suggests that these changes should be in place by 2023.
- The speed at which such a compelling number of countries gave support to the 15% minimum global tax rate is significant and is a strong indication that some solution like this will be implemented.
- Led by France, some countries are already imposing unilateral digital taxes aimed at U.S. tech giants such as Amazon, Google, and Facebook. It is notable that under the new rules these taxes, regarded as unfair trade practices by the U.S., would be withdrawn in favor of the proposed global approach.
- When the G7 decision was announced, some critics panned it as a “G7 money grab” in which larger countries were imposing a new form of “economic colonialism” on developing nations seeking to attract inward investment by offering low tax rates. With 130 countries representing more than 90% of global gross domestic product, now signing on, that argument becomes more tenuous. Regardless, it remains undeniable that a certain loss of national sovereignty will be felt by at least some in the world.
- OECD Secretary-General Mathias Cormann said: “This package does not eliminate tax competition, as it should not, but it does set multilaterally agreed limitations on it.” Despite this comment, once implemented these limitations mute the effective impact of countries offering lower corporate tax rates.
- Low tax holdouts from some Caribbean nations to Ireland and Estonia, will be expected to fall in line. In France, which has led the charge for a tax on digital giants in particular, Finance Minister Bruno Le Maire stated they would work to bring reluctant countries in line.
- Although nations like China and Russia, which have scant track records for international taxation coordination, have suddenly joined much of the world in agreeing to the 15% minimum global tax, it is unknown how they and other countries which are not OECD members will align with OECD rulemaking. This leaves many unknowns related to global execution.
- Despite widespread initial agreement, the effort may face defections as details develop. New digital taxes and global corporate minimum taxes must be rationalized with existing tax policies, like GILTI and BEAT in the US, and receive approval by national legislatures.
- With 130 countries representing more than 90% of global gross domestic product in agreement, it is certain that conventional tax planning as we know it (i.e., maximizing taxable profit allocations to low tax environments) is over. This agreement provides a powerful message of unity and intent by governments around the world.
- Arguably, much of the aggressive international tax planning that gave rise to the 10-year global journey toward this agreement was already snuffed out by tax rules targeting specific structures (e.g., ATAD rules in the EU and anti-hybrid rules in the US).
- How the details of this agreement play out is where things get interesting. In the flurry of excited announcements, the differences between the basic concepts of nominal tax rate, taxes paid as a percentage of profits, and effective tax rate per accounting conventions have been snowed under. If the intent is really to enforce a minimal effective tax, or taxes paid, of 15%, the debate will inevitably tilt towards how foreign rules determine the taxable base.
- The English version of the OECD announcement twice specifically cites a 15% minimum tax rate. The German and Spanish-language versions of the announcement both mention tax rate and tax (base). If that is something more than an oversight, we’re in for a rocky ride.
- Will considerations such as environmental tax incentives be negated by the parent home country topping up the perceived tax shortfall? Similarly, how will loss carry forwards – which impact taxes paid, but not necessarily the effective tax rate per accounting conventions – be treated?
- Whatever the resolution will be on these pain points, tax authorities will increasingly refocus their audit efforts on the two sources that bring in most tax revenue relative to audits: indirect tax and transfer pricing.
- This refocusing will include new regulatory requirements for automation with signs indicating that this will vastly increase over the next few years, especially with respect to indirect tax. As a sign of things to come, mandatory e-invoicing (Continuous Transaction Control, or CTC) has been introduced already in a number of countries, and many others have announced similar plans.
- Multinationals should focus on avoiding and mitigating paying double tax and tax penalties. The OECD outline states that, in-scope MNEs will benefit from dispute prevention and resolution, which will avoid double taxation including issues related to transfer pricing and business profit disputes. Centralization and automation remain key to maintaining necessary governance and being well-armed during dispute resolution.