Are IFCs Collateral Damage? The Global Minimum Tax and Its Impact

Roughly three months after the US Treasury Secretary Janet Yellen had described the fact that for over 18 years US companies booked half of all foreign profits in just seven low tax jurisdictions as a race to the bottom; as a prime mover behind the final tax deal, she could change her tune to ‘…this deal will remake the global economy into a more prosperous place for American business & workers’.[ii]

It is likely that the winners in these negotiations will be the G20 countries, including Ireland, which negotiated for the removal of just two seemingly innocuous but actually important words  ‘at least’ from preceding 15 per cent, in order to seal the deal. At the time of writing the earlier article Ireland, Estonia and Hungary, all members of the EU whose votes were required to validate the deal, still held out.

Having eventually signed the deal, clearly all is still not well: the Irish Minister of Finance for instance, recently acknowledged that tax receipts from corporation tax in Ireland will begin to decline from 2023 onwards.[iii] On the other hand, undoubtedly Ireland will continue to attract global technology and manufacturing giants for other reasons including its ‘can do culture’, its solid infrastructure and human resources. Pascal Saint-Amans, Director of the OECD Centre for Tax Policy Administration (CTPA), acknowledged that ‘countries are happy and unhappy at the same time’[iv].

Four countries – Kenya, Nigeria, Pakistan and Sri Lanka – have yet to accede to this agreement, perhaps with good reason.

According to the press release which was issued three weeks before the G20 Heads met in Rome, the final deal struck means that 136 countries and jurisdictions representing more than 90 per cent of global GDP, will reallocate more than US$125 billion of profits from around 100 of the world’s largest and most profitable multinational enterprises to countries worldwide, ensuring that these firms pay ‘a fair share’ of tax wherever they operate and generate profits.

The press release also clarifies that those multinational enterprises with global sales above EUR 20 billion and profitability above 10 per cent – which can be considered as the winners of globalisation – will be covered by the new rules, with 25 per cent of profit above the 10 per cent threshold to be reallocated to market jurisdictions[v].

Impact Of The Final Accord On IFCs

136 nations reaching accord on a highly contentious and difficult matter such as the Global Minimum Tax is a huge feat. But the conclusion of the previous article remains unchanged: IFCs, including the BVI, will be impacted by the Global Minimum Tax, but these impacts can be successfully managed to avoid them becoming collateral damage.

IFCs remain within the line of fire. The Director of the OECD’s CTPA, referring to IFCs as ‘tax havens’ – a phrase that continues to raise the ire of IFCs –  told Bloomberg that he expects there will be some ‘reallocating entirely from tax havens’ of MNE’s[vi]. His remark was not dissimilar to that of the US Treasury Secretary who a few weeks earlier had told the Washington Post that the Global Minimum Tax would ‘reverse a decades-long decline in the amount of revenue governments are raising from large firms and crackdown on tax havens’[vii].

However, IFCs should continue to thrive under this new tax regime as they are no longer about tax avoidance and optimisation. Instead, they offer certainty, sound regulations and a cadre of the most highly trained and experienced professionals in every field of financial services. Clare Leckie and Rebecca Munro of Pragmatix Advisory, writing recently in this publication, expanded on this assessment perfectly, noting that IFCs offer ‘neutral, stable and secure locations in which to structure and contract cross-border investment and business activity. In the case of the British-associated centres, they offer internationally well-regarded legal systems derived from English common law with final right of appeal to the Judicial Committee of the Privy Council in London. Many have developed clusters of specialist financial, legal and professional services firms. Jersey, for example, was once known almost exclusively for its banks; now it is a thriving interdependent ecosystem of banks, trust companies, fund managers, fund administrators and family offices supported by ranks of accountancy firms, law practices and other specialist professional services.’[viii]

This may be the perfect segue back to the point made in the previous article about the importance of IFCs continuing this message in their marketing programmes. The unique selling points clearly articulated in the previous paragraph must become the rallying cry for IFCs to attract new business and remain competitive. Indeed, the importance of positive and effective marketing was stressed by several speakers at the recent international “Global Currents” Conference held in the BVI to honour former Deputy Governor Dr Robert Mathavious OBE.[ix] 

The previous article also focused on the diversity of the BVI offerings as well as their steady growth. That steady and consistent growth is evidenced by the BVI Financial Services Commission’s most recent FSC Statistical Bulletin which shows that the number of new incorporations in Q3 of 2021 increased by 52.27 per cent when compared to the number of new incorporations for the same time of the previous year. Further, there was a 4.49 per cent increase in the number of new incorporations when compared with the previous Q2 2021 statistics. Limited Partnerships and other offerings also continued their steady growth as can be seen quarter on quarter[x].

The BVI continues to have a good story to tell but it cannot afford to become complacent. This jurisdiction and other IFCs must diversify further, building more substance into their offerings as required by their economic substance laws but, more importantly, for the jurisdiction’s own sustainability. Areas such as expanding into ESG funds, Green Finance and more Blockchain activity come to mind.

As tax neutral jurisdictions, IFCs may well consider themselves to be outside the ‘scope’ of  the GMT initiative. Indeed, the statement issued by the OECD on the same day as the press release states that Inclusive Framework members are not required to adopt the GloBE (Global Anti- Base Erosion) rules which were subsequently published, in mid-December.[xi] As the benefits of implementing the Global Minimum Tax aspect of Pillar 2 are yet to be seen, it is unlikely that any IFC will opt to do so at this time. It may well be that other challenges, such as the pending implementation of public registers of beneficial ownership next year, may be of greater concern for CDOTs.

For IFCs, perhaps the greatest impact of the Global Corporate Minimum Tax in the short term lies in the uncertainty of the future.

The Global Minimum Corporate Tax was intended to ‘fundamentally reform international tax rules’. The international tax landscape will undoubtedly change going forward. Notwithstanding most IFCs’ strong regulatory, governance and legal infrastructures, and the fact that tax avoidance is no longer most offshore jurisdictions’ raison d’etre, it is impossible to predict how MNEs will respond in the medium and long term. Further, although IFCs will remain engaged with both the OECD Secretariat and members of the Inclusive Framework, they will have little control over how the new rules will work in practice.

Nevertheless, it bears repeating, first, that there is a relatively small number of MNEs based in the BVI with a global turnover of  EUR 750 million per annum; and second, that they are not necessarily in the BVI for tax avoidance purposes. While the 15 per cent tax would be payable where the company is headquartered, it may well be in that company’s interest to continue to function in the BVI and simply pay the ‘top up tax’. But these are still early days – too early for conjecture.

What’s Next?

Geoff Cook, writing recently for International Investment on 22 December 2021, described the Global Minimum Tax agreement as the most significant change in global taxation since the 1920s and observed that there are still technical hurdles to overcome, including the multilateral agreement for Pillar 1. Perhaps more importantly, he observes that there is still a degree of unhappiness all around: ‘The idea of American digital companies ceding profit to be taxed by other countries isn’t popular with US law makers and abandoning digital levies is equally unpopular in the European Parliament. Developing countries don’t see too much new tax revenue coming their way either’[xii].

Whether the domestic legislation needed will pass the US Congress is beyond the scope of this article but Pascal Saint-Amans’ recent cryptic response to the effect that ‘we shall have to wait and see’,[xiii] coupled with an intractable Senator Joe Manchin, would suggest that the Inclusive Framework just may have to wait beyond 2023 to implement this new regime.

Singapore is not a member of the G20 but it stands as perhaps the leading jurisdiction in attracting international business, including investments in manufacturing and services of all kinds. The perspective of its Prime Minister continues to be positive about the Global Minimum Tax. Prime Minister Lee Hsien Loong believes the move will not cause the dynamic to fundamentally change. Countries will ‘find other ways to make themselves attractive’ to get their investments and the projects they want, he said.[xiv]

This is sound advice for all IFCs to follow. Every day the need to diversify becomes more important. It should be a paramount objective for all IFCs.

In the case of the BVI, the McKinsey study of eight years ago remains relevant. Of its 10 fundamental recommendations for diversifying, less than five have been implemented.[xv]

Beyond that, as concluded in my previous article, IFCs must stay engaged with the OECD Secretariat and members of the Inclusive Framework. The BVI was honoured to have a senior member of the Secretariat visit the BVI during the celebrations in late 2021 for Dr Robert Mathavious. Not only did the OECD Representative meet with industry representatives and attend the international Conference, but he delivered the keynote address on the Global Minimum Tax, to kick off the Conference. His address provided a degree of comfort to the BVI, which has long sought to adhere to the highest standards in its regulations and business practices.

The concluding message of the previous article – that IFCs must stay engaged with the OECD Secretariat as well as with relevant members of the Inclusive Forum – remains unchanged. In fact, if anything, this is the time to become even more engaged with them. As a colleague of mine maintains, it’s better to be at the table for lunch than to be on the menu.

 

Footnotes:

[i]  US Treasury Department Press release, 30^th October 2021

[ii] OECD Press Release, 8^th October 2021

[iii] IFC Review, 7^th January 2022

[iv] Independent.ie. 16^th November 2021

[v] OECD Press release, 8^th October 2021

[vi] Bloomberg, 22^nd November 2021

[vii] ‘As wealthy nations back Yellen’s call for global taxation, fears about national differences quietly persist’, The Washington Post, 31^st October 2021

[viii] Clare Leckie, Rebecca Munro, 12^th January 2022

[ix] Global Currents Conference Note, 17^th November 2021

[x] Q3 2021 BVI FSC Statistical Bulletin

[xi] Tax Challenges Arising from the Digitalization of the Economy – Global Antibase Erosion Model Rules (Pillar 2) 20^th December 2021 – OECD

[xii] International Investment, 22^nd December 2021

[xiii] IFC Review, 12^th January 2022

[xiv] Straits Times, 1^st November, ’21

[xv] Building on a Thriving and Sustainable Financial Services Sector in the BVI, December 2014