When the news broke earlier this month that the G7 finance ministers had brokered an international agreement on a global minimum rate for corporate tax to ensure the largest multinational companies pay their fair share, it didn’t take too long for the devil to appear in the detail.
While UK chancellor Rishi Sunak was hailing the ‘truly historic’ deal, commentators began picking over the limited information that was available in the G7 communiqué to see how it could be applied to efforts already underway under the auspices of the Organisation for Economic Co-operation and Development's (OECD) base erosion and profit shifting (BEPS) project.
The finance ministers' solution has two strands, or pillars. The first proposes the allocation of taxing rights for market countries (ie the countries where multinational companies do business) on the basis of at least 20% of profit exceeding a 10% margin, while at the same time looking to dismantle existing and proposed digital services taxes.
The second pillar is more straightforward – a global minimum corporate tax rate of at least 15% on a country-by-country basis. The next step, as far as the G7 is concerned, will be to secure an agreement among the G20 countries and their central bank governors at their meeting in July.
G7: 'clothing a hard-nosed revenue-raising exercise in the language of progressive principle'
Practical issues
Other tax commentators have also questioned how the proposals will work in practice. As Jason Piper, ACCA’s head of tax and law, says: ‘Nobody has defined “profit”. These are the issues that we know haven’t been agreed. It is significant that the G7 has said this in public, but there is a long way to go before it will have any impact.’
In particular, Piper argues that the Pillar 1 proposal to reallocate ‘super’ profits will be a complicated measure that could potentially raise only a relatively small amount for individual jurisdictions. In addition, the measure will only take into account business-to-consumer profits and not business-to-business profits, which will add even further complexity.
The proposals fail the tests of stability, certainty and simplicity
And to complicate matters further, Piper notes that the tax base from which profits are calculated can vary. Countries use differing accounting standards – for example, IFRS or US GAAP – as the basis upon which they make their calculations. And even the companies that fall within this global net could change over time, with companies at the margin not sure whether their turnover, or any other form of qualification, will keep them in or out of this elite collection of global companies.
In short, Piper believes the proposals fail the tests of stability, certainty and simplicity.
Carve-outs?
The situation is complicated further by the suggestion that there may be carve outs – it has already emerged that Sunak had called for the UK’s financial services sector to be excluded from the proposals.
Others argue that the proposed minimum corporate tax rate has been set too low – Ireland, famed for its low tax rate, has a headline rate that is only 2.5% less than the suggested 15%. As Gabriela Bucher, executive director of Oxfam International, says: ‘It’s absurd for the G7 to claim it is “overhauling” a broken global tax system by setting up a global minimum corporate tax rate that is similar to the soft rates charged by tax havens like Ireland, Switzerland and Singapore. It is setting the bar so low that companies can just step over it.’
It is setting the bar so low that companies can just step over it
This doesn’t even take into account the tax jurisdictions where no corporate tax is currently charged. Bermuda has already signalled its intention to assert its sovereignty over its own tax code and, of course, it should be remembered that many low or no tax jurisdictions have close connections to members of the G7, such as the UK and US.
As George Bull, RMS’s tax consultant, says: ‘The US and many other global powers have down the centuries raised their flags over territories that are now tax havens, so there may well be political and economic consequences and amendments to these proposals.’
So eyes will now turn to the G20 meeting in Venice in October. Whether the proposals, like the host city, begin to sink into the lagoon remains to be seen, but even if they pass this next hurdle, they will then face scrutiny by the OECD and the 139 country signatories of the BEPS project.
