As published on accountancydaily.co, Wednesday November 20, 2019.
This proposal could be better than the original plan to tax profits on the basis of sales in different jurisdictions, according to analysis by a French economic advisory unit.
The French Council of Economic Analysis, which has the role of advising the French government, examined the OECD’s pillar one and pillar two proposals which were recently developed as part of its base erosion and profit shifting (BEPS) framework, in order to assess which would raise the most revenues.
The organisation said France faces £5bn of annual tax revenue losses due to tax avoidance in tax havens by multinational firms located there, at a conservative estimate.
It has developed a model to predict the change in relative attractiveness of countries and the amount of tax revenues collected following the implementation of different reforms currently being discussed at the OECD.
The simulations show that the reforms that aim at designing a profit splitting rule to partially reallocate profits to destination markets (pillar one at the OECD) have a negligible impact on tax revenues and a modest positive impact on the attractiveness as a business location of most non-tax haven countries.
However, the implementation of a minimum effective tax rate, which forms part of pillar two, would reduce profit shifting and generate substantial gains in tax revenues, and would not much change the attractiveness of all countries. As a result, it is recommending implementing a worldwide minimum effective corporate tax rate and redesigning the current proposals under pillar one.
The council suggests the existing pillar one plans will increase the complexity of the determination of taxing rights without significantly changing their allocation. Instead, it suggests allocating a fraction of overall global profits to the market countries and using effective anti-abuse measures. However, it notes that the reform of taxation also requires rigorous and harmonised information from firms’ country by country reporting.
Discussing the scenarios in more detail, it says that using models where profits are allocated partially to destination markets, the results suggest a modest positive impact on attractiveness for the two countries it studied. This is calculated at about 0.3% for both France and Germany with pillar one, and a 1.4% rise for both countries for a scenario where 30% of all profits are taxed in the destination country. Since only a fraction of profit is taxed in production countries, the location of multinational activities is less sensitive to the relatively high statutory tax rate in France and in Germany.
As for tax revenue, the effect appears slightly positive in France (up 0.1%) and slightly negative in Germany (down by 0.1%). The council says the effects on both attractiveness and tax revenues of these two reforms are very small compared to the other reforms.
In contrast, turning to pillar two, there is a large and positive impact on tax revenues after the implementation of a minimum effective tax rate (up 9.4% for France and up 5.7% for Germany). The increase in the effective corporate tax rate of firms in France and Germany lies behind this result.