As published on cyprus-mail.com, Friday 9 April, 2021.
Cyprus professionals have mixed feelings about the proposal from the US Treasury Secretary Janet Yellen to establish a global minimum corporate tax.
“It’s impractical and makes no sense in its current form,” insists former Cyprus Finance Minister and auditor Takis Clerides.
“It is coming, but the devil is in the details,” warns Philippos Raptopoulos, partner and head of Tax and Legal Services at EY Cyprus.
Janet Yellen former head of the Federal Reserve, on Monday made global headlines when, in a speech, she called for all countries to agree on a minimum tax rate for the largest corporates.
Such a levy, Yellen said, would help “make sure the global economy thrives based on a more level playing field, and would help end a 30-year race to the bottom.” While the idea is mired in controversy, many EU Member States will welcome America’s new expression of multilateralism after the knee-jerk nationalism of the Trump era.
Yellen’s call echoes discussions at the G20, which was supposed to issue a mandate on this subject last June.
“High level details of the US proposals for a global minimum tax have been made public and these contain some similarities to the proposals already under discussion at the OECD. However, not all details are yet publicly available and there may be differences between the US proposals and those of the OECD, for example, the determination of the tax base, explains Marios Andreou, partner, head of Tax Advisory at PwC Cyprus.
“Furthermore, although the OECD has not officially concluded on a global minimum tax rate earlier discussions have reportedly focused around a rate of 12.5 per cent whereas the US recent proposal is for a higher global minimum tax rate of 21 per cent, which is higher than the tax rate of many EU Member States. We should expect these discussions to continue,” Andreou adds.
The reason for the call is jurisdiction shopping. Big companies can no longer move their headquarters to low-tax countries unless their real centre of decision-making is located there too. But it’s easy for big companies to move activities around to places where they get the best deals on tax. The EU Commission has only had limited success in getting these special deals reversed in the courts.
The largest tech companies have used such loopholes to avoid paying more than $100 billion in taxes between 2010 and 2019, according to the non-profit organisation Fair Tax Mark.
The problem, as Clerides explains, is that very few large companies pay tax at the basic rate.
“Countries around the world offer a slew of incentives to big corporates to attract them. Let’s say the global minimum corporate tax rate is set to 20 per cent. These incentives can reduce the effective tax rate to a much lower percentage. It sounds good: People will hear this and say, ‘Too bad for those low-tax countries, now big companies will stay home and get the same tax rate as there. But it doesn’t work like this, and, unless you change all the systems, it never will.”
However, some tax experts feel that a “change for all the systems” is what is coming. “Such a move as Yellen proposes would indeed require a complete revamp of global tax. There are issues like what threshold will be set for this minimum tax rate, and how it will effect bilateral tax agreements, among many others,” explains Savvas Klitou, director of Tax Services at Baker Tilly Cyprus.
“Certainly such comprehensive change cannot be put into effect before 2023,” he adds.
“But it could be a boon for Cyprus: There have been proposals to make the minimum tax rate 12.5 per cent, which is the same as ours,” Klitou points out.
Irrespective of such proposals, the basic idea of the minimum tax is likely to be adopted around the world, according to EY’s Raptopoulos. “The basic concept is good, and will receive general support, but the impact on certain countries will depend on how it is applied. It has to take into account deductions, how withholding tax works and a number of other issues. Simply imposing a single corporate tax rate for the whole world will not make sense.”
“We understand that the Cyprus Government is actively participating in shaping the discussions on this topic at EU level and is committed to ensuring that Cyprus remains an attractive location for business operations whilst respecting international norms,” Andreou points out.