International community agrees on roadmap for corporate tax overhaul

The 129 members of the OECD/G-20 Inclusive Framework on Base Erosion and Profit Shifting have agreed on a timeline for reaching a new global agreement for taxing multinational enterprises by the end of 2020.

The Cayman Islands is a member of the body, which approved a 40-page document last week that outlines how the digital economy can be taxed around two pillars.

The proposals under Pillar 1 are likely to result in a shake-up of taxing rights that will benefit larger importing countries by re-allocating some of a corporation’s profits to jurisdictions where its customers or users are located.

Pillar 2 seeks to introduce a minimum effective corporate tax rate for multinationals globally.

The OECD has taken the lead to address the problem that especially digital companies may have significant market share in a country without having any physical presence and as a result escape corporate taxation there.

The solutions under consideration all involve significant changes to corporate taxation globally by altering the nexus, or on what basis companies are taxed, and how taxable profits are allocated.

Moving away from the concept of physical presence as the basis for taxation to a new system of profit allocation will result in a significant shift of global corporate tax revenues.

It is therefore no surprise that there is currently no agreement among the Inclusive Framework members about the preferred method of profit re-allocation or changes to the tax nexus.

One of the proposals aims to allocate taxing rights to the country where a company’s active users are based, on the premise that users play a significant role in value creation, for example by providing their personal information, which is then monetised.

Another approach argues that a company generates value and makes profit by engineering, marketing and selling its product and that the value created by this “marketing intangible” should be recognised in the jurisdiction where the product is marketed.

A third proposal combines a company’s significant economic presence with sales to determine where taxes should be paid.

While the measures are aimed primarily at digital companies, the problems of separating digital businesses from traditional ones make it unlikely that measures such as the minimum global corporate tax rate would be limited to digital businesses.

The OECD said the minimum level of tax would give countries a new tool to protect their tax base from profit shifting to low- and no-tax jurisdictions and aims to address remaining issues identified by the OECD/G-20 BEPS initiative.

The Paris-based organisation claims that the Globally Effective anti-Base Erosion measure (GloBE) “could effectively shield developing countries from the pressure to offer inefficient incentives, and in doing so help them in better mobilising domestic resources by ensuring that they will be able to effectively tax returns on investment made in their countries”.

The proposal is also intended as “a backstop to Pillar One for situations where the relevant profit is booked in a tax rate environment below the minimum rate”.

However, some Inclusive Framework members have argued that the proposed GloBE rules would “affect the sovereignty of jurisdictions that for a variety of reasons have no or low corporate taxes”.

In 2015 the OECD estimated up to $240 billion revenue losses from BEPS, about 10% of global corporate tax revenues. In response, the organisation created the Inclusive Forum to coordinate international measures to fight the erosion of tax base and profit shifting, and to improve the international tax rules.

“Important progress has been made through the adoption of this new Programme of Work, but there is still a tremendous amount of work to do as we seek to reach, by the end of 2020, a unified long-term solution to the tax challenges posed by digitalisation of the economy,” OECD Secretary General Angel Gurría said.

Hinting at the lingering disagreement between Inclusive Framework members, he added the broad agreement on the technical roadmap would have to be followed by “strong political support toward a solution that maintains, reinforces and improves the international tax system”.

The Programme of Work is expected to be endorsed by G-20 Finance Minister meeting on 8-9 June in Fukuoka, Japan.

The Inclusive Framework agreed that the technical work would have to be complemented by an impact assessment of how the proposals will affect government revenues, growth and investment.