As published on royalgazette.com, Wednesday 24 November, 2021.
A global agreement by more than 130 countries to change corporate income tax rules may be in trouble of falling apart.
This from a global tax advocate whose organisation has been claiming that Bermuda and several other countries have been corporate tax havens to the detriment of poor countries.
Alex Cobham of the Tax Justice Network said that already there are countries that had signed up, but who are suddenly complaining about the direction of the accord.
And he said that there is a “deep unfairness” to the deal anyway, which favours rich countries.
He told Hamilton Rotarians: “Firstly, It’s not a good deal for most countries. Secondly, we’re not very optimistic that it will actually hold [together] over the next year or two.”
He also said that even if it does proceed, it may need to be opened up to further negotiations.
Mr Cobham added: “One of the big questions is whether or not it will be opened up again within the OECD, which seems to have done a deal to favour its own bigger members, at the expense of everyone else.”
He sees a possibility of discussions within a much larger body that includes more representation from smaller nations.
He says if it does succeed, it won’t really accomplish all that was desired but will harm Bermuda and other countries — some who were bullied into accepting the deal by the United States and other OECD countries.
And even though the recent agreement was hailed as a big success at curbing corporate income tax avoidance, his UK-based organisation says that it does not go far enough.
The featured speaker at the Hamilton Rotary’s lunch meeting via Zoom, Mr Cobham, the chief executive of the Tax Justice Network, said that with two key goals at stake, real progress was lost in negotiations.
Pillar One was intended to ensure that multinational corporate profits are assessed globally and then apportioned to the countries based on economic activity.
Pillar Two is for the global minimum tax, and to ensure that even if corporations still managed to shift their profits through low-tax jurisdictions and avoid home country taxes, they would still be forced to pay some minimum taxes.
But Mr Cobham told Rotarians: “I would say unfortunately both have failed to a quite significant degree in the negotiations; Pillar One, most dramatically.
“Instead of having all the profits of all multinationals being apportioned, we have a small share of profits only of the 100 or so biggest and most profitable multinationals that will be apportioned.
“The arms-length principle remains in place for all other profits and for all other multinationals. And even the basis on which they are doing the apportionment is according to sales only, and that tends to favour countries with the large markets.
“But it doesn’t really favour production countries that don’t have such a big share of sales, but does have a bigger share of employment.
“So, lacking balance in the formula means even a very small amount of unitary taxation is going to be relatively unfavourable to lower-income countries.
“The bigger OECD economies are taking the bigger share. And that’s what we see much more dramatically in Pillar Two — the minimum tax.”
Mr Cobham said that the weaknesses introduced include the 15 per cent rate, which continues a significant incentive to shift profits out of countries with higher rates. He cited African countries with tax rates of 25 to 35 per cent.
But he said what is even more unfair is that the revenue would be taken by European and other large countries.
If certain provisions are ratified, he sees Bermuda’s zero per cent corporate tax as detrimental to the island, because Bermuda would not be able to obtain any freed-up tax, with that money going to the nation in which companies are headquartered.
“What we’ll see,” he said, “is the headquartered countries maintaining their rights to obtain their tax.”
Mr Cobham said: “If Bermuda retains a zero per cent rate, and let’s say a French multinational is shifting a billion dollars profit out of Brazil and into Bermuda.
“It won’t be Brazil that is able to pick up the $150 million of tax that you get by applying a 15 per cent rate. And it won’t be Bermuda, unless Bermuda decides to implement a 15 per cent rate. It will be France, because France is the headquartered country of the multinational.
“That’s what the OECD proposal involves, unless we get through a quite complex negotiation over multilateral instrument, and its fully ratified, which will involve countries giving up significant revenues — countries like France.
“What we’ll see is the headquarters countries retaining their rights to those revenues. Bermuda will lose because there will be no incentive to shift profits into Bermuda any more.”