Efforts to address the tax challenges from the digitalisation of the economy with new rules governing where and on what portion of profits taxes should be paid, could increase global corporate tax revenues by 4% or US$100 billion, according to the Organisation for Economic Cooperation and Development.
The OECD has released an economic impact analysis of proposed international tax reform measures on Thursday, stating that revenue gains were broadly similar across high-, middle- and low-income economies, as a share of corporate tax revenues.
The Inclusive Framework on BEPS, which brings together 137 countries and jurisdictions, decided during its 29-30 Jan. meeting to move ahead with a two-pillar approach for the multilateral negotiation of international tax rules.
Under the first pillar, the Inclusive Framework members will discuss the so-called nexus, or tax presence, and profit-allocation rules to ensure that companies cannot escape taxation in jurisdictions where they conduct significant amounts of business but have no physical presence.
A second pillar aims to address BEPS (remaining base erosion and profit shifting) issues and ensure that international businesses pay a minimum level of tax.
Most of the “significant positive impact on global tax revenues” would come from the introduction of a minimum level of tax that international businesses would have to pay, the economic impact assessment found.
The OECD believes that a minimum tax rate on all income would reduce incentives to shift profits to low-tax jurisdictions and prevent a race to the bottom on corporate taxes.
Cayman Finance CEO Jude Scott last year said the proposal suggests that the OECD is targeting low-tax jurisdictions indiscriminately and seeks to give countries the right to unilaterally assess penalties purely on the basis that a zero- or low-tax jurisdiction is involved, regardless of whether profits have been properly consolidated, reported and taxed in other jurisdictions.
The new analysis indicates that it would be lucrative for rich countries to do so. The second pillar proposal gives countries the right to ‘tax back’ profit that is currently taxed below the minimum rate. It would operate as a ‘top-up’ tax, up to an as yet-to-be-defined minimum rate. The measure would raise a significant amount of additional tax revenues, reduce tax-rate differentials between jurisdictions and reduce the incentives for multinationals to shift profit, the OECD said. High-income countries stand to benefits the most from the global minimum tax, the analysis showed.
The re-allocation of some taxing rights to market jurisdictions, regardless of physical presence, in contrast, would only bring a small tax revenue gain for most jurisdictions. Low- and middle-income economies are expected to gain relatively more revenue than advanced economies, while investment hubs would experience some loss in tax revenues. More than half of the re-allocated profits globally would come from 100 large multinationals.
The analysis covers data from more than 200 jurisdictions, including all members of the Inclusive Framework, and more than 27,000 multinationals.
The overall direct effect on investment costs is expected to be small in most countries, the OECD said, as the reforms target firms with high levels of profitability and low effective tax rates. The reforms would also reduce the influence of corporate taxes on investment location decisions.