The beginning of the end for tax havens?
Over the weekend it was widely reported that the 'G7' nations had agreed a deal on global tax reform.
This blog looks at what has been 'agreed' and some of the challenges that lie ahead before reform of the international tax rules can be achieved.
Described by the UK government as a "seismic" agreement to ensure that the largest multinational tech giants pay their "fair share" of tax in countries in which they operate, the identity of the (US-headquartered) multinational companies that are the target of these proposals is no secret.
There are, in fact, 2 "pillars" to the announced 'agreement':
- reform of the international tax regime so that certain multinational companies will be required to pay tax where they do business (this pillar has been driven by the major European economies).
- a global minimum corporate tax rate of "at least" 15% in each country in which multinational companies do business (this pillar is of utmost importance to the US).
Any agreement to reform the international tax regime would be the first for over a century. The rules have been dismissed as no longer being fit for purpose, in particular in a world where business is increasingly digitalised such that it is no longer necessary for multinationals to have a physical presence in the jurisdictions in which they do business.
This first-step has been a long-time coming. Efforts to reform international tax rules started in 2013, with the publication of the OECD's Base Erosion and Profit Shifting (BEPS) action plan. It has been suggested that the change of administration in the US has provided momentum to reach this point. Another theory is that desperation to raise funds from tax revenues, driven by the Covid-19 pandemic, has also spurred governments into action.
However, this is far from the end of negotiations and perhaps is better viewed as being the beginning of the final stage of reaching an agreement. There are numerous hurdles still to be overcome, including:
- agreement as to the precise details of the new international tax regime. The UK government's press release states that only the "largest and most profitable" multinational companies will be caught. Global firms with at least a 10% profit margin would have 20% of any profit above the 10% margin reallocated and subjected to tax in the countries in which they operate. Exactly how this threshold applies, and the detailed definitions and concepts that will undoubtedly be required in order to make this work, remain to be seen.
- agreement as to a global minimum corporate tax rate. G7 ministers have proposed a global minimum rate of "at least" 15%.
- countries such as the UK, France and Italy agreeing to abolish their 'digital' tax regimes. In the UK, the digital services tax (DST) has been in place since April 2020. The UK government has always stated that the DST is an interim measure only, to be repealed once an "appropriate international solution" has been agreed to the perceived problem faced by countries such as the UK; the inability to adequately tax highly digitalised businesses operating in a given jurisdiction without a physical presence there. The US has consistently labelled such unilateral digital taxes as unfairly targeting US tech companies. Whether the US requires these national taxes to be repealed before the US legislates to enact any globally agreed approach, is unclear.
There has already been criticism of the proposed 15% minimum corporate tax rate. Commentators, campaigners and charities say this has been set far too low and that at this rate it would fail to end the so-called "race to the bottom" of falling corporate tax rates. No doubt that G7 nation ministers will point to the fact this has been phrased as "at least" 15%, holding out the possibility that this minimum rate may rise. Indeed, the French finance minister has called this a starting point and has said that he will fight to make the minimum tax rate as high as possible.
The proposals will be discussed in more detail at the planned 'G20' meeting of Finance Ministers and Central Bank Governors in July. After that, the detail underpinning the proposed new regime will need to be agreed by the 139 nations that make up the OECD.
The G7 proposals, whilst historic, are surely only the beginning of a process. To succeed, the proposals will need much wider backing from nations such as China and India. Not to mention jurisdictions such as Ireland (with a current corporate tax rate of 12.5%).
Initial responses from the US tech companies most likely to be affected by any new rules were supportive. Those companies will almost certainly have much to say about the detail of any new global tax regime.