Renewed push for global corporate tax reform

Efforts to reform international corporate tax rules before the end of this year will continue, according to a statement released last week by the OECD/G20 Inclusive Framework on BEPS.

The group of 137 countries and jurisdictions that is negotiating international tax rules decided during its 29-30 Jan. meeting to move ahead with a two-pillar negotiation to address the tax challenges arising from the digitalisation of the global economy.

The tax reforms of the first pillar aim to ensure that multinational companies can be taxed in jurisdictions where they conduct significant business but have no physical presence in the form of offices, service centres, manufacturing or other operations.

Participants agreed to pursue the debate about where tax should be paid – the so-called nexus rules – and what portion of profits should be taxed – the profit allocation rules – on the basis of a “unified approach” released by the OECD in October 2019.

The OECD said the endorsement of the unified approach was a significant step as it eliminated two competing proposals. The group released an updated programme of work that outlines the remaining technical areas and political challenges to deliver a consensus-based solution by the end of the year, as mandated by the G20.

The Inclusive Framework aims to seek political agreement about the detailed architecture of the proposal at the next meeting in July in Berlin.

“It is more urgent than ever that countries address the tax challenges arising from digitalisation of the economy, and the only effective way to do that is to continue advancing toward a consensus-based multilateral solution to overhaul the international tax system,” said OECD Secretary-General Angel Gurría in a press statement.

The renewed push for corporate tax reform was made possible after France and the US reached an agreement in their conflict over the former’s 3% tax on digital revenue of big tech companies like Facebook and Google.

The US government claims the levy unfairly targets US companies and threatened retaliatory tariffs of up to 100% on $2.4 billion worth of French goods. France agreed to delay collecting the digital tax until the end of the year, while the US will not impose more tariffs.

A host of European countries have announced they will impose new national digital taxes, if the negotiations over globally agreed tax rules fail. A second pillar of the tax discussions takes aim at zero-tax jurisdictions, like the Cayman Islands, by trying to adopt new rules that would ensure that international businesses pay a minimum level of tax.

The proposal contains an income-inclusion rule that replicates controlled foreign company rules which exist in many countries. It would operate as a top-up tax to a minimum rate calculated as a fixed percentage. The actual rate that would be applied under the proposal has not yet been discussed and other elements of the rule, as well as carve-outs, still have to be agreed, with different design options under consideration.