As part of a “historic” deal, G7 finance ministers have agreed to a two-pillar plan aimed at targeting large multinationals including online tech giants such as Facebook and Google. The intention of the initiative is to ensure that tax is paid in the jurisdiction in which profits are made, as well as to introduce a global minimum tax of 15 per cent in an attempt to combat tax evasion and profit shifting.
The OECD have welcomed the developments, with Secretary-General Mathias Cormann stating that "The combined effect of the globalisation and the digitalisation of our economies has caused distortions and inequities which can only be effectively addressed through a multilaterally agreed solution." (Source)
However, commentators such as Anthony Travers OBE argue that the reforms are “a step en route to the ultimate OECD game plan - an overarching global tax authority” in which tax autonomy and competition are at risk and economic colonialism is a certainty. In our latest Big Debate, we consider the implications of this latest initiative with contributions from stakeholders in the jurisdictions most affected.
"Even if the global minimum CIT is ‘voluntary’, it is not beyond reason to think that small IFCs might be coerced to adopt the rate."
"The global tax environment is hugely challenging and this is a once in a generation opportunity to provide some robust, sensible solutions to improve the international tax landscape and provide consensus and certainty."
"The G7 agreement on a global minimum corporation tax is a major step forward in much-needed reform tackling international tax avoidance."
"There’s little for most IFCs to worry about in the short term: what the G7 announced looks weaker than previously feared; there’s neither a workable detailed agreement nor G20 sign-off yet."
"The Irish Government have been clear in its view that the implementation of the Pillar 1 and 2 proposals must ensure a fair and sustainable international tax framework that allows healthy competition between countries."
"Governments can stop international tax avoidance by choosing – rather than avoiding – global cooperation."
"If fully implemented, it would imply a shift toward worldwide taxation of corporate income, ironically coming just a few years after the United States moved away from that conceptual approach in its Tax Cuts and Jobs Act."
The right of a country to determine its own tax system is one flowing from sovereignty. Having a favourable tax climate – low tax rates and/or a general suite of incentives – has been part of the investment attraction tool kit and development strategy of small Caribbean IFCs and also small European States like the Republic of Ireland and Cyprus.
What we have seen in recent years is a constant chipping away at this sovereign right as small IFCs seek to increasingly comply with the dictates of larger jurisdictions which argue that tax competition is eroding their tax base. While small IFCs have been saddled with the blame for multi-national companies’ (MNCs’) profit shifting, large countries need to look no further than their own tax codes for why this is the case!
There is much that remains unknown about the ultimate design of the proposed global minimum corporate income tax (CIT) including what will be the agreed rate, to which kinds of corporations would this proposed tax apply, what is assessable income for the purposes of this tax and the like. These are the kinds of discussions which, if pursued globally, should be done in a multilateral setting and not the world’s rich nations setting the rules for all.
In less than a week after the G7 announcement, certain countries, including the UK (a G7 member) have lined up to request exemptions from the proposed global minimum CIT. It is also worth noting the Biden Administration still needs congressional support for raising the tax to fund his ambitious infrastructure plan.
The global minimum CIT would work to take away from MNCs the incentive to set up in no/low tax jurisdictions. Even if the global minimum CIT is ‘voluntary’, it is not beyond reason to think that small IFCs might be coerced to adopt the rate. This move represents yet another chipping away at the economic sovereignty of small IFCs. What it effectively does is seek to take away a tool which these small IFCs have used for promoting inward foreign direct investment at a time when their COVID-19-crippled economies need those funds the most for propelling sustainable economic recovery.
Latest step towards new global tax rules for large MNEs
The proposals to amend global corporate tax rules for large multinational enterprises (MNE) which have been agreed in principle by the G7 finance ministers are significant for all countries engaged in cross border trade and some countries will be more impacted than others. What does it mean for international finance centres such as Jersey?
The proposals are aimed squarely at tackling large multinational companies, particularly large tech companies, which are not a significant feature of Jersey’s business model. The proposed design of Pillar 2 also aligns closely with Jersey’s existing tax model, which is under-pinned by robust and endorsed substance and BEPS policies. And the design of Pillar 2 makes provision for the unique role of exempt investment funds and vehicles.
The global tax environment is hugely challenging and this is a once in a generation opportunity to provide some robust, sensible solutions to improve the international tax landscape and provide consensus and certainty – but it must be done right, consistently and with full agreement at international level.
That progress is now being made is significant and important, and we remain fully engaged with the key bodies involved as things progress over the coming weeks and months and the full details are agreed internationally – that may take some time.
The G7 agreement on a global minimum corporation tax is a major step forward in much-needed reform tackling international tax avoidance. For too long companies have been able to shift their profits to low-tax jurisdictions, carving out vital tax revenues from host countries and creating an unfair advantage over smaller competitors. The devil is in the detail, but if these proposals are implemented, they could end the incentive for tax havens to exist, making tax fairer overall.
For the proposals to be effective two things are needed. Firstly, the minimum tax must be set high enough to end the race-to-the-bottom on tax. The agreement states “at least 15%” but we’d like to see this at the originally proposed level of 21 per cent, ultimately working towards a more ambitious 25 per cent rate. Secondly, there has been confusion over whether some firms – notably Amazon – would be covered. The rules that determine which companies fall within the “pillar 1” proposals need to be clarified and made transparent.
This is just the beginning of a long road, but we should be optimistic that some of the largest economies in the world have called time on the unfair and harmful practice of profit shifting to tax havens.
G7 AREN’T PLAYING A BEAUTIFUL GAME
Competition is wonderful.
With millions tuning in to watch their national teams battle it out in Uefa’s Euro 2020 football championship and potentially larger audiences next month for the Olympics, there is no denying the spectacle, energy and determination that can be engendered through the structured rivalry of sport. Earlier this year, when 12 of Europe’s most successful football clubs tried to create a ring-fenced ‘competition’ for themselves, there was, quite rightly, mass uproar followed by a rapid and humiliating U-turn.
But it is in business, economics and democratic politics that the power of open competition has driven so many of the advances of the modern world (and the absence of competition that has characterised so many of its failures).
Why then do the leaders of seven nations that account for 45 per cent of the global economy (and a quarter of delivered covid vaccine doses) but only ten per cent of the world’s population think that tax competition is so harmful?
There’s little for most IFCs to worry about in the short term: what the G7 announced looks weaker than previously feared; there’s neither a workable detailed agreement nor G20 sign-off yet; and many offshore jurisdictions have already done the heavy lifting to restructure legislation and business models to accommodate this and the EU’s ever-lengthening list of spurious blacklist-avoidance requirements.
But the longer-term direction of political travel is more than disheartening. Much like in football, those currently at the top want to ring-fence the game for themselves and set the rules at the expense of those in the other leagues, regardless of whether they’re small island states or populous African developing nations.
Ireland has been an active participant in projects implemented by both the OECD (BEPS) and the EU (ATAD Directives) which have reformed the international tax landscape in recent years. The Irish Government have been clear in its view that the implementation of the Pillar 1 and 2 proposals must ensure a fair and sustainable international tax framework that allows healthy competition between countries.
The EU has previously attempted to reframe the international tax framework in Europe by introducing a common consolidated corporate tax base. It would now seem that the G7 countries are attempting to achieve a similar result by invoking a minimum level of tax in all OECD countries and design new rules on when a tax nexus would be created, which would be based more on where customers are located rather than where value is created.
In response to the G7 finance ministers’ recent accord to introduce a global minimum tax of 15 per cent on a country by country basis, Ireland’s Minister for Finance has reiterated that any agreement should meet “the needs of small and large countries, developed and developing”. Ireland remains committed to its 12.5 per cent rate of corporation tax, on the basis that tax rates are vital to keeping smaller countries like Ireland competitive, relative to larger countries that benefit from “advantages of scale, location, resources, [and] industrial heritage”. Whilst the details of any final agreement are not yet clear, Ireland will continue to foster a transparent, agile and forward looking business environment.
 Speech by Minister for Finance, Paschal Donohoe TD, to Virtual Seminar on International Taxation with the Department of Finance
In the media-storm of news stories about the G7 tax decision, many forgot to ask why a small club of seven rich countries should be the place where global tax rules are decided upon. The short answer is that it should not. The G7 is anything but globally representative, and content of their tax agreement has strong biases in favour of G7’s own interests, at the expense of the world’s poorest countries. Formally, the G7 noted that the final decision will be taken by the G20/OECD-led Inclusive Framework, but it is clear that these larger forums are under pressure to follow the G7. Moreover, one third of the world’s countries are not members of the Inclusive Framework, let alone the G20. The G77, which represents over 130 developing countries – has called for global decisions on tax to be made at the United Nations, where all countries can participate on an equal footing. But that proposal has been blocked by OECD countries such as the US and UK.
Those that defend the G20/OECD and G7’s approach often argue that it is a choice between tax havens or a system of global tax rules written by rich country clubs. But this is a false dichotomy. Governments can stop international tax avoidance by choosing – rather than avoiding – global cooperation. In fact, that is the only road that will get us to a fair, effective and politically sustainable global tax system.
On Monday, G7 leaders reiterated their support for a new framework for the taxation of the largest, most profitable multinational firms. The framework contains two components: a minimum tax rate and a new tax base. While many of the details are up in the air and implementation is nowhere near guaranteed, here are some initial thoughts.
The minimum tax rate would be 15 per cent. A cynic may argue that it is easy for countries that all have corporate tax rates of over 15 per cent to agree to a corporate tax rate of at least 15 per cent, but this rate would apply to overseas profits as well. If fully implemented, it would imply a shift toward worldwide taxation of corporate income, ironically coming just a few years after the United States moved away from that conceptual approach in its Tax Cuts and Jobs Act.
The new tax base would create more space for countries to tax (the most profitable) corporations based on where their sales occur, as opposed to where production facilities or intellectual property are located. All else equal, this would make it slightly less attractive for corporations to relocate their headquarters and production facilities away from countries with relatively high corporate tax rates, as the tax rate they face would become a weighted average of various national rates. This looks a bit more like a consumption tax than a traditional corporate income tax (though the profit threshold above which the new tax base is activated introduces an element of taxation of economic as opposed to accounting profits as well).