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Guide: The OECD's Minimum Corporate Tax

Gunnar Jaerv
Gunnar Jaerv 13 July 2021

The Organization for Economic Co-operation and Development is based in Paris, and has 38 member countries. Because those counties are the world’s economic powerhouses, the OECD often leads the way, forming the nucleus of larger alliances.

After two days of talks, it announced on July 1 that 130 countries, representing 90% of the world’s GDP, had agreed on new tax rules.

The agreement involves a 15% base rate on corporation tax across the world. While signatories would be free to charge higher corporation tax, none would charge less. Countries that have signed off on the initiative include the G7 nations and the EU. It also included significant changes to how taxation rights are allocated.

What’s in the OECD’s new tax plan?

The plan is technically known as the Inclusive Framework on Base Erosion and Profit Shifting (BEPS). Following nearly a decade of OECD-led negotiations, BEPS involves two “pillars”, intended to ensure that Multinational Enterprises (MNEs) pay tax where they operate and earn profits, as well as “adding much-needed certainty and stability to the international tax system”, in the OECD’s words.

Pillar One is intended to ensure a fairer distribution of profits and taxing rights among countries, and is especially focused on “the largest MNEs” — the OECD doesn’t name Google, Facebook, and Amazon, but virtually all reporting connects the dots.

Currently, these businesses are taxed only where their corporate headquarters and/or intellectual property resides, leaving them free to place headquarters in a low-tax jurisdiction even if they generate the majority of their profits in other jurisdictions.

The OECD explains that BEPS will combat this by “re-allocating some taxing rights over MNEs from their home countries to the markets where they have business activities and earn profits, regardless of whether firms have a physical presence there”.

Under Pillar One, the OECD expects to see more than US$100 billion reallocated to market jurisdictions each year.

Pillar Two introduces a minimum 15% global corporation tax, designed to prevent international competition over corporate tax, reducing the “race to the bottom effect” whereby nations fear to raise their corporate tax in case big companies simply move their headquarters to a lower-tax jurisdiction.

The OECD expects Pillar Two to lead to the generation of about US$150 billion in additional global tax revenue annually.

Which countries have signed up?

Signatories include major economic centres like Germany, the USA, China, India, and Japan, as well as historically low-tax nations like Panama, Jersey, San Marino and Paraguay.

The full list of countries that have signed the agreement is here, accurate in February 2021 and therefore including 139 countries, not all of which have come to an agreement yet. Ireland, Hungary and Estonia, among the lowest-tax regimes in the EU, did not sign the deal, and neither did Peru, Barbados, Saint Vincent and the Grenadines, Sri Lanka, Nigeria or Kenya.

Holdouts walk a fine line, risking being isolated by a global tax regime that will include even historically low-tax jurisdictions like the British Virgin Islands. Balanced against that is the huge boost to Ireland’s economy; its 12.5% corporate tax rate has delivered, encouraging residence, and hence tax receipts, from Apple, Google, Pfizer, and a large number of American multinationals.

In a July 1 statement, Ireland’s Minister for Finance, Pascal Donahoe, said that “Ireland has fully supported the Pillar One proposals”, and had “expressed our broad support for the agreement on Pillar Two but noting our reservation about the proposal for a global minimum effective tax rate of ‘at least 15%’”.

“As a result of this reservation, Ireland is not in a position to join the consensus”. However, Donahoe told journalists that he “remain[ed] committed to the process and aim to find an outcome that Ireland can yet support”. Signatories are continuing to exert pressure on holdouts and others may yet come round. US Treasury Secretary Janet Yellen told a news conference:

“In some cases there are specific technical issues that can be addressed and where possible we will discuss and try to bring them aboard”.

When and how will the BEPD come into effect?

The OECD is a voluntary organization, without the power to enforce its positions. So after this general agreement on goals comes a lengthy period of discussion and planning to implement them.

The G20 nations (Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Republic of Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom, the United States, and the European Union) are expected to meet to finalize plans for implementing Pillar One within the bloc in October.

However, after a meeting in Italy to ratify the plan, Secretary Yellen told a news conference that it was likely that the new rules would not be ready for lawmakers until 2022, and that Pillar One’s tax reallocation rules would be on “a slightly slower track”, while she hoped to include provisions to implement Pillar Two’s minimum tax plans into a budget “reconciliation” bill this year.

Congress could approve that bill with a simple majority, without the possibility of a senate filibuster and potentially without the support of any Republicans. But Pillar One would require additional legislation which could be held up in both House and Senate, and could require a 60-vote supermajority in the Senate.

In the EU, the new rules will require an EU law which will probably be passed during France’s presidency of the bloc in 2022 and which will require unanimous backing from all EU members. In other words, there’s still a lot that could happen to derail this plan even in the places where it’s most popular.

Barbara Angus, the head of global tax policy at the accounting firm EY and a former chief tax counsel for the House Ways and Means Committee, told the New York Times: “They have a huge amount of technical work to do,” she added, “and now it’s clear that they also have some more political work to do in order to see if they can bring those other countries onboard”.

In China, the key appeal for businesses is not tax breaks but a highly-integrated supply chain, relatively low business costs and large internal market. Its mainstream corporate tax rate is 25%, but it has a preferential rate for qualified high-tech companies, and experts suggest that the new rules are therefore more in China’s favour than otherwise. Cai Chang, a tax professor at Central University of Finance and Economics in Beijing, told the South China Morning Post:

“I think it is acceptable because our preferential tax rate is often already set at 15 per cent. It’s not in conflict. As a matter of fact, a global minimum helps China’s anti-tax avoidance endeavours”.

What will it mean for tax regimes around the world?

Many countries already have unilateral digital services taxes, in an attempt to create a tax regime equal to the demands of the emerging, de-localized digital economy. And it’s not yet clear how the changeover will take place. Secretary Yellen clarified that EU countries had agreed to withdraw such taxes, and had “agreed to avoid putting in place in the future and to dismantle taxes that are discriminatory against U.S. firms”.

In other countries, Digital Services Taxes (DSTs) are being levied in a bid to increase general tax receipts — particularly in nations that struggle with debt or with low tax revenue. DSTs are increasingly popular in Europe, though often with limited scope (only on sale of user data, for instance) and fairly high revenue thresholds. India levies a 6% “equalization levy” on digital service providers. Kenya is betting on its 1.5% DST to deliver US$45 million in the first half of 2021. For the Kenyan government, there must be a replacement for these tax dollars. And the goals they represent, including a more equitable playing field between digital and physical services and between Kenyans and foreign-owned companies, must also be met; so it is for other countries. To be successful, the OECD’s new plan must deliver benefits to these countries.

Some critics warn that it won’t. Oxfam issued a press release on July 1, the day the plan was announced, cautioning that “the long-overdue tax reform was meant to recover billions in underpaid corporate tax for all countries,” but that “the G7 and EU will pocket more than two-thirds of new cash that a global minimum corporate tax rate of 15 percent will yield” while “the world’s poorest countries will recover less than 3 percent”.

The domestic outlook inside the G7 looks good, however, with the Biden administration positive that the plan “will level the playing field and make America more competitive. And it will allow us to devote the additional revenue we raise to making generational investments, which are necessary to keep America’s competitive edge razor sharp in today’s global economy”.

Conclusion

The OECD’s new tax plan will establish a floor for corporation tax worldwide, making it more difficult to avoid paying tax, and handing more control of tax regimes to individual countries by changing the basis on which tax is levied. The OECD and the plan’s supporters say they also hope to stabilize the worldwide tax regime. However, there remains a lot of work to be done before the plan becomes law anywhere, support in the EU and Caribbean is far from unanimous, and there are lengthy, contested legislative processes, especially in the United States, to contend with.

Businesses should start preparing for the plan or something very like it to become law, though, including designing compliant tax plans. Without a revenue threshold, and with relatively few loopholes, this won’t be a compliance issue immediately, but it will be a major one eventually.

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