In the IFC world, we are perhaps used to the concept of unintended consequences, and instances where what starts out as one thing morphs subtly but considerably into something else – the Alternative Investment Funds Managers Directive (AIFMD), Base Erosion and Profit Shifting (BEPS), and Brexit to name a few.
Now the entire global corporate tax landscape looks set to be turned on its head. What started as an approach to tackling digital giants – the Googles, Apples and Amazons of this world - has transformed into something looking at multinationals more widely; and that has now turned very quickly into an exercise that appears to look at capturing and changing the entire cross-border corporate tax framework.
This represents the potential for a seismic shift and IFCs need to be ready not just to analyse and assess this, but to stand up and challenge what it could all mean - not just for themselves, but for global trade and investment.
A Familiar Narrative
First of all, let’s set the scene.
Corporate tax rates have been falling quite consistently over the past couple of decades as countries have tried to attract firms and compete for corporate business. Since 2018, statutory corporate tax rates have fallen in 76 jurisdictions around the world, stayed the same in 12, and increased in just six.
Meanwhile, fiscal positions across the OECD have worsened as national debt has risen consistently across OECD members; today, the UK’s national debt is equivalent to 113 per cent of GDP, compared to 62 per cent 10 years ago. In France, those figures stand at 122 per cent today and 83 per cent in 2008; and in Spain at 114 per cent compared to 47 per cent.
At the same time, effective rates of tax – the rates multinationals are paying on average as result of varying rates across their global operations and their tax domicile arrangements – have been in freefall, with firms such as Amazon, Google and Starbucks being well trailed for paying minimal or no tax at all in the UK, despite significant turnovers, whilst Apple’s case against the EU has also been well documented.
Against this backdrop, the underlying narrative here should be familiar and not all that surprising; the drive towards a new international corporate tax framework is based firmly on the conviction that the current tax rules, rooted in 1920, are unfit for the post-industrial world, and the concern that profits can be generated in one place with little to no presence.
It’s also symptomatic of the post-global financial crisis drive amongst larger countries – particularly in the EU - to clamp down on tax avoidance in order to tackle their widening national debt issues and increase tax receipts. They see territories around the world who are able to maintain lower corporate tax rates, and they are questioning why they can do this and surmising that having lower tax rates means that profits and assets are being artificially booked and held in those lower tax economies, at the expense of raising government receipts ‘at home’.
But what started out as a project to tackle the global digital players – France, the UK, and the US with its Global Intangible Low Tax Income (GILTI legislation), have all gone it alone on this front – has turned into something much, much bigger.
Low tax territories have become the target once again, and that’s despite the majority of IFCs committing to transparency measures, cooperation initiatives, reporting frameworks, and substance requirements – and having had their tax regimes assessed and given the endorsement in the not too distant past by the very same organisations who are now pushing this new agenda forward. It’s a reflection of just how far and fast attitudes are changing around these issues.
So, what is being put forward, and what’s on the horizon?
In an attempt to take control of the direction of travel at a multilateral level, the OECD put forward proposals in October, with a view to leading a consultation on the way forward, intended to be completed by the end of the year – an impressive timescale and again reflective of the intention to push this agenda forward at lightning pace.
Overall, the approach is a much more territorial one, designed to ensure that multinationals pay tax “wherever they have significant consumer-facing activities and generate their profits”. The proposal brings together the common elements of three competing proposals from OECD member countries and is based on the work of the OECD’s BEPs work – which IFCs, including the Channel Islands, are already signed up to.
The proposal would seek to re-allocate some profits and corresponding taxing rights to countries and jurisdictions where multinationals have their markets and look to ensure that those multinationals conducting significant business in places where they do not have a physical presence, be taxed in such jurisdictions, through the creation of new rules.
Those rules are quite complex, but would essentially introduce a Minimum Alternate Tax (MAT), with firms raising profits in any territory offering a rate below that threshold (which is yet to be determined) being obliged to pay an additional ‘top up’ tax payment.
Importantly for IFCs and investors engaged in cross-border activity, the proposals have the potential to really undermine the concept of tax neutrality, making no distinction at this stage between corporate trading and investment or fund vehicles.
Engagement and Collaboration
Over the consultation period, there is likely to be a great deal of technical discussion around what these proposals mean for cross-border trade, investment and profits, but with the EU firmly behind the agenda and the OECD looking to take a lead on it and build a consensus- based solution, there is clearly traction for this movement, and IFCs need to be proactive and fully engaged as it steams ahead.
That means some serious lobbying and engagement at governmental level, but it also means genuine collaboration and joined-up thinking across the IFC world at industry level and meaningful input into key bodies like the Global Forum, with a view to articulating a clear counter narrative to argue the case for tax neutrality. Ideally, the aim should be towards a carve-out that would see investment vehicles and funds distinguished from trading companies in the overall proposals.
Ultimately, there is a real need to uphold the principle of not taxing investors twice – at source and at destination – a principle that forms the foundation of tax neutrality but that is largely misunderstood in some of the global fora driving these proposals forward.
If that principle is eroded, then we are looking at a very different future indeed for international investment and capital flows. A future where investment is less efficient, more expensive and less attractive – and that is an unintended consequence that would seem to be completely counterintuitive and poles apart from where we should be aiming, particularly as the world looks forward to an ongoing period of uncertainty and, most likely, another global market downturn.
Right now, more than ever, investors should be encouraged to put their capital to work to stimulate growth, promote development, support positive change, and create jobs and wealth.
Making the international tax system clearer and fairer, and achieving a ‘level playing field’ between different jurisdictions, will no doubt be the phrases trotted out frequently as these proposals progress, and aiming for a fairer system to ensure global trading companies are playing by the same rules and are operating in an agreed, clearer framework would seem a sensible aim.
But this is also a real, once in a lifetime opportunity to get this right, in an area where IFCs can play a really meaningful and positive role. However, if IFCs sleep-walk into this new era, and tax neutrality is allowed to be undermined, it certainly won’t end up feeling like a level playing field. And it certainly won’t just be the IFCs that will suffer.
Geoff Cook is an experienced Chair and non-executive director. He has led significant business enterprises for more than three decades and helped major international groups to grow and prosper. As a Chartered Director, Geoff has deep knowledge of corporate governance, global regulation, and risk management. He has authored numerous articles and papers on cross border investment and the role of International Finance Centres (IFCs) in the global financial system. Geoff is an Advisor and non-executive director to a select number of Family Office, Private Capital, and Advisory boards. He was appointed Chair of Mourant Regulatory Consulting in 2021 and Chair of Quilter Cheviot International in 2019 to lead and develop the firm's international strategy. Geoff is also Chair of Apex Financial Services (Jersey) Ltd, a leading fiduciary and is presently Chair of the Society of Trustee and Estate Practitioners (STEP) Global Public Policy Committee. He was formerly the CEO of Jersey Finance and Head of Wealth Management HSBC with extensive international cross border experience across various sectors.