Thursday, June 1, 2023

Global tax deal faces challenges of detail, implementation and holdouts


After years of complex negotiations, 130 countries have agreed to fundamentally change the way that companies are taxed around the world — but some detail remains to be decided and domestic legislation completed, and holdout nations still have not been won over.

The deal was concluded at the OECD in Paris on Thursday after the G7 group of leading economies reached an agreement last month.

It will introduce a global minimum corporate tax rate of at least 15 per cent and grant countries new rights to tax large companies based on where they earn their revenues, rather than where they are located.

The minimum rate is likely to raise more than $150bn in additional taxes a year, and a further $15bn to $17bn annually will be generated by the jurisdictional change, according to OECD estimates.

Only the world’s largest companies — those with annual revenue exceeding €20bn and pre-tax profit margins of at least 10 per cent — will be affected by the jurisdictional change. These companies will pay tax on 20 per cent to 30 per cent of the profits they make, over and above the first 10 per cent of profits as a share of revenues.

A mandatory dispute resolution regime will be introduced to prevent nations from wrangling with each other, a move business had pushed for.

The agreement confirmed that a minimum rate of at least 15 per cent will apply to companies with annual revenue of €750m or more. Countries can choose to apply it to companies of all sizes if they wish.

The holdouts

Just two weeks ago many countries were refusing to sign up, prompting an intense period of high-level arm twisting by the US, which reinvigorated the stalled global talks earlier this year by setting out fresh proposals.

Reluctant signatories included China, Argentina, Saudi Arabia, Russia and Turkey.

Only eight countries held out: Barbados, Estonia, Hungary, Ireland, Kenya, Nigeria, Sri Lanka and St Vincent & the Grenadines; several are tax havens which will substantially lose out.

Peru abstained as it is without a government.

The refusal of three EU member states is embarrassing for Brussels and could pose a practical problem. The European Commission plans to introduce the international agreement into EU law but tax directives require unanimity; it is unclear whether the refuseniks will veto a directive.

Irish finance minister Paschal Donohoe said on Friday that he wanted to “continue to engage” and “co-operate” with the negotiations but it was “a matter of huge national sensitivity” and “there was not enough clarity or enough information . . . to sign up”.

Aisling Donohue, tax partner at Andersen in Ireland, said the decision was “unprecedented”.

“Usually when there’s a global consensus, we tend to fall into line,” she said.

Winners and losers

The jurisdictional change will most affect countries that host many multinationals’ headquarters.

Research by Michael Devereux and Martin Simmler of the University of Oxford’s Saïd Business School estimated that about 64 per cent of the jurisdictional increase in tax receipts would come from US-based companies, with 45 per cent from tech companies.

Companies excluded from the jurisdictional change include financial services and those involved in extractive industries. London’s success in winning the financial services exemption will reduce the total profits affected by about half, Devereux and Simmler estimated.

However, countries that host the headquarters of many multinationals will be the biggest beneficiaries of the global minimum tax, in particular the US.

Companies excluded from the minimum tax include shipping groups and those that receive incentives to invest in tangible assets such as factories and machinery.

Tax havens will lose out most because the deal allows countries to levy a top-up tax on companies that have not paid the minimum rate in each jurisdiction that they operate in — wiping out the advantages gained from channelling revenues through low-tax jurisdictions.

Scatter chart showing higher profits booked in lower tax jurisdictions by comparing total profit, profit per employee and effective tax rates for various countries

Some developing countries have complained the deal does not bring them enough tax.

Logan Wort, executive secretary of the African Tax Administration Forum, which advises governments across the continent, said “probably at least 15 countries” that signed up had done so with reservations, which he said was not reflected in the OECD announcement.

However, he added, the deal “may not be perfect” but “it is certainly going to make a hell of a boost to [the ratio of] tax to GDP, to total revenues, and . . . to collect what we were never able to collect before”.

Unresolved questions

The global agreement will supersede the national digital taxes that some countries have already introduced, but it is not clear when they will give these up.

The agreement promised “appropriate co-ordination” but tax experts warned it would not be straightforward because each country needs to legislate at its own pace.

In the US, for example, President Joe Biden must seek congressional approval for at least some parts of the agreement — and Republicans are likely to oppose it.

Some countries are reluctant to withdraw their taxes until the US legislative process has succeeded.

The extent to which other tax incentives are covered by the agreement is unclear.

Ross Robertson, international tax partner at BDO, said regimes such as patent boxes — which offer lower effective corporate tax rates for research and development activities — could be affected.

Dan Neidle, partner at law firm Clifford Chance, said that if such incentives remained under national control, multinationals would still choose to base themselves in jurisdictions with the most generous regimes. “The more leeway you have, the more opportunity for arbitrage,” he said.

Next steps

The deal will be discussed at the meeting of G20 finance ministers next week in Venice, and then at the G20 leaders’ meeting in Rome in October.

Technical talks will continue at the OECD to thrash out the remaining details.

Each country must enact the final deal through domestic legislation next year and the changes are due to come into force in 2023.

Manal Corwin, head of Washington national tax at KPMG and formerly the US deputy assistant secretary for tax policy (international affairs), said agreeing the details would “require a fair amount of work”, and warned that “the timeline for implementation is quite ambitious”.

“Choreographing this outcome by 2022 for a 2023 effective date across multiple legislative and parliamentary processes will be quite a feat,” she said.

Additional reporting by Laura Noonan

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