In October 2021, the OECD was expected to announce the final details of its initiative for countries to cooperate to impose a global minimum tax. However, the statement that was issued was disappointingly low on detail, probably due to the 130+ countries involved in the negotiations focusing on high-level issues such as the actual rate of tax (now agreed at 15 per cent) without deciding more significant points of detail about the new rules and the necessary implementation procedures.
The (hopefully final) model rules with these details are now expected to be issued at the end of November 2021, so watch this space. That said, in general terms, we now know enough about the high-level aspects of the proposal to think about the impact that the global minimum tax will have on wealth management clients.
Some observations about the impact on these rules on high net-worth individuals are as follows.
First, the tax is to be applied to groups of companies that have consolidated gross revenues exceeding €750m per year. That figure is high enough to exclude many of our clients, but some at the higher end will undoubtedly be caught.
Secondly, for those groups that are in-scope of the new rules, the minimum tax of 15 per cent will be applied not to their taxable income as calculated according to local tax rules but generally to their accounting profits as disclosed in their financial statements. This would include items of income that are not currently subject to tax; for example, (and this depends on the rules of each country concerned) capital gains, unrealised annual revaluation gains of investment assets, foreign sourced income, other exempt and preferentially-taxed types of income, portfolio dividends, etc. So, by way of an example, although the notional statutory corporate tax rates in Singapore and Hong Kong are 17 per cent and 16.5 per cent respectively, the actual effective tax rates are much lower, probably less than 10 per cent. Therefore, imposing a 15 per cent tax rate on accounting profits will result in large increases in tax burdens of affected corporations. Of course, corporations based in zero-taxed jurisdictions will fare even worse.
Thirdly, the minimum tax rate of 15 per cent will be calculated on a per jurisdiction basis, not on a worldwide basis. So, if a group pays 20 per cent tax in Country A and 10 per cent tax in Country B, a 5per cent top-up tax will be payable in respect of Country B even though the group overall might already be paying over 15 per cent tax on a worldwide basis.
Fourthly, the new rules are expected to come into force in 2023. This gives little time for large groups to evaluate their likely exposure and implement the necessary systems changes for their tax compliance, let alone do any planning. Most publicly-owned groups are already discussing the implications with their tax advisers but amongst family-owned private groups, there appears (at least in my experience) to be a lack of focus on (and even awareness about) the proposals and of the urgency that is being required to meet the coming challenges.
Fifthly, compliance will be a nightmare. For a start, it is uncertain which countries will choose to impose any top-up taxes. The basic proposal is that the top-up tax will be paid in the country where the ultimate parent corporation of the group is resident (not merely incorporated), under a refined controlled foreign corporation-type regime. But a number of countries where low-taxed subsidiaries operate are considering imposing their own top-up taxes or otherwise raising their taxes to the 15 per cent rate instead in order to share in the windfall taxes that will be raised by the new global minimum tax. And if groups manage to avoid jurisdictions where such top-up taxes will be levied, such groups’ intra-group payments to low tax jurisdictions may still be subject to the countries from which payments are made to the group will be entitled to impose withholding taxes or deny tax deductions to payors in order to effectively collect the tax for themselves that other countries have chosen not to collect. Another dilemma is that, in the proposal, a single group company will be responsible for compliance generally worldwide and a single tax authority will process the relevant global information, but the rules for determining which entity in the group actually bears any top-up tax are complex. So, it’s all a bit of a mess compliance-wise, but the tax lawyers and accountants can wrestle with that problem.
Sixthly, these global rules are merely a base-line. Some countries might choose to impose a minimum tax on companies that fall under the €750m revenue threshold (some countries are floating a €20m figure but it’s too early to tell what will actually happen). On top of that, some countries might decide not to apply the new rules at all which would mean that other countries will have the ability to impose the top-up tax instead. This means it won’t necessarily be clear at the outset where the group will end up paying its top-up taxes. There may possibly be arbitrage opportunities, at least in the early phases, whereby top-up taxes might not apply, and planning opportunities might exacerbate this. Also, the new system provides for a wide range of withholding taxes to be levied on intra-group cross-border payments which are taxed in the recipient’s jurisdiction at less than 9 per cent but that aspect will not come into effect until 2024.
Seventhly, there will be exemptions for government entities (what a surprise!), non-profit organisations, pension funds and investment funds but not necessarily in all cases. Shipping income is exempted. There will also be various carve-outs linked to the use of tangible assets (not yet defined) and number of employees in the relevant jurisdiction. Of more significance, the rules will not apply in respect of a jurisdiction where the group’s revenues are less than €10m and profits are less than €1m.
The Immediate Plan
If you are a wealth manager advising a high net-worth family whose corporate structure holds assets and businesses generating more than €750m of annual revenue (and maybe less, for some countries), what should you be thinking about?
An immediate issue is whether the revenue accrues to a single consolidated group. There generally needs to be a single holding company. In a typical discretionary trust structure, the trustee would own an underlying company (e.g., in the Caribbean or Channel Islands) that in turn holds the underlying asset-holding and business entities. That underlying company would be the consolidated parent. But if the trustee directly owns individual companies, those companies would normally not be consolidated through the trustee. (The same applies where the common “parent” is an individual who owns companies in his or her own name directly, although this would hardly be the case of a person generating over €750m of annual revenue.) So, the first step for any wealth planner is to check the family’s asset holding structure to determine whether a consolidated group exists that earns the requisite amount of gross income.
The next issue is to calculate the group’s effective tax rate in each jurisdiction in which its subsidiaries operate and to identify those jurisdictions where the rate is less than 15 per cent. The denominator of this ratio is the profit figure determined by the relevant financial statements which must, or course, be prepared in accordance with proper accounting standards (with some expenses denied). The numerator would include the corporate income tax (and also includes any foreign withholding taxes levied on income such as cross-border interest, royalties and portfolio dividends, and tax levied in the parent’s jurisdiction under its controlled foreign corporation rules with respect to that jurisdiction). Such a review will indicate potential additional tax exposures and thus assist in making an impact assessment of the global minimum tax on the group as a whole. The review also might expose some planning opportunities (e.g., shifting taxable income from a high-taxed jurisdiction to a low-taxed jurisdiction or shifting deductible expenses in the other direction).
Some issues are still to be resolved and won’t be known until the final model rules are issued in late November. These concern the treatment of past year losses, the effect of timing differences caused by the accounting versus tax treatment of certain types of income and expenditures (e.g., deferred tax provisions), the determination of the cost base of capital assets held before the new rules came into effect, and numerous other minor but essential details.
A third issue concerns families with US connections and investments because these new global rules will work in conjunction with (and not replace) the US’s own minimum tax rules (the so-called GILTI regime). The finalisation of the details of the co-existence of the two minimum tax regimes will be announced later.
The fourth pressing issue relates to ensuring compliance with tax obligations and ensuring that tax returns can be properly prepared by the proposed start date of 2023. Although the consensus amongst advisers appears to be that this start date is exceedingly ambitious and possibly unachievable (especially because so many details about the new tax still need to be negotiated and agreed by the 130+ countries involved in this exercise), the OECD remains adamant regarding the deadline. (And indeed, the OECD has had a very good track record in the past in implementing fundamental global tax changes.) A group’s preparation involves conducting group impact assessments for each jurisdiction in which its subsidiaries and branches operate, implementing necessary changes to IT systems to capture relevant items of income and expenditure and, of course, preparing and filing the necessary tax returns on a timely basis.
On a conclusionary point, the OECD and its FATF relative have been trail-blazing corporate tax reform since the 1990s, starting with rules for disclosure of corporate ownership and continuing through to anti-money laundering rules, registers of ultimate beneficial ownership, CRS (Common Reporting Standard) and the entire BEPS (base erosion and profit shifting) initiative. Both institutions have achieved success through a combination of cooperation and coercion of countries around the world. The global minimum tax is not the end of the story because more tax reforms will likely be proposed and implemented over the coming years. For tax practitioners, these are exciting times. For corporations and families affected by these changes, keeping up to date with these changes and living through them is a greater challenge.
Senior Consultant in Tax, Baker & McKenzie in Hong Kong, formerly Senior Advisor at KPMG in Hong Kong. He has more than 25 years’ experience advising on corporate tax, wealth management, trust planning and estate succession matters. Olesnicky was until recently the Chair of STEP in Hong Kong. He chairs its China sub-committee and is the Hong Kong representative on STEP's Worldwide council. He is an honorary lecturer in the Law Faculty of Hong Kong University.