On 12th October 2020 the Organisation for Economic Co-operation and Development (OECD) released the details of a revolutionary global corporate tax plan designed to prevent tax avoidance by multinational enterprises (MNEs). It is the fruit of a collaboration between 135 countries under the direction of the OECD, an organisation representing 37 developed economies. It could transform how businesses pay tax and create a more level playing field for MNEs’ competitors.
As nations have grown economically closer, and digital transformation and ease of trade erodes the need for physical headquarters in each territory of operation, it has become easier than ever for companies to avoid tax. They can do so by shifting profits to low tax jurisdictions where they are legally headquartered. The OECD wants to boost governments’ ability to collect taxes from MNEs by changing global tax rules so that companies are no longer simply taxed depending on where they are based.
The proposed rules fall under two separate “pillars”, both of which would only apply to businesses with revenues over €750mn. Pillar 1 is designed to prevent companies from paying very little tax in country A, even if they make vast revenues there, by moving profits to country B where they are headquartered. This is an accusation which has been levelled at companies from Amazon to Starbucks in the UK. Under the proposals, rather than profits only being taxed in country B, a portion of MNEs’ profits would be taxed in country A based on how much of their revenue they make there. This pillar would apply to companies providing “automated digital services” and to “consumer facing businesses”, the latter being everything from food retailers to consumer electronics businesses.
Pillar 2 is designed to stop MNEs being taxed at very low rates overall by effectively applying a global minimum tax rate. If a company pays very low corporate taxes because it is registered in a tax haven, jurisdictions where its subsidiaries are based would be permitted to collect taxes up to the global minimum.
The group of 135 nations collaborating on this plan described the proposals as a “solid basis” for future rules, which is international organisation jargon for “we haven’t actually agreed anything yet”. Many issues remain outstanding, including what the global minimum should be and what proportion of profits should be shared out globally based on revenue location. Perhaps even more importantly the US has proposed that the Pillar 1 requirements should be optional, something which the UK and France are against. With Joe Biden now confirmed as the president-elect, global politics could be about to see a fundamental change. However, agreeing such a comprehensive change to global tax rules is unlikely to be easy, especially as many digital companies such as Amazon and Facebook are based in the US.
What would the implications be for business if the politicians can reach agreement? For MNEs this is likely to mean additional regulatory burdens, as well as possibly an additional tax bill. However, the lack of tax paid by digital service companies has spurred numerous European countries, including the UK, to institute or propose digital services taxes on the revenues of online businesses. Compared to these unilateral taxes, both the OECD and companies including Facebook argue that a global tax would provide certainty and stability. It would also prevent trade wars resulting from unilateral action, which could cost more than 1% of global GDP according to the OECD and which would largely affect MNEs.
For competitors to MNEs, such as department stores like John Lewis who compete with multinational online retailers on everything from electronics to clothing, a global tax minimum would be a breakthrough. It would reduce the advantage MNEs get from minimising their tax burden, creating a more level playing field and a fairer and better functioning market.
Implementing what is effectively one of the first global taxes is unlikely to be straightforward but these changes would benefit most businesses, as well as, crucially, the public purse. As we reach the stage of political negotiations and these rules get closer to reality, MNEs and their competitors should be prepared to show they are listening to the concerns driving the rules and develop strategies to work with individual governments, including in the UK, on the implementation of the rules.