Corporate tax reform agenda still set for end of the year

The discussions under the auspices of the  Organisation for Economic Cooperation and Development to reform corporate tax rules to deal with the challenges arising from the digitalisation of the economy and attempts to institute a global minimum corporate tax rate are still underway despite the COVID-19 pandemic.

The OECD expects a reform package to be ready in October. The 137 countries that make up the Inclusive Framework of BEPS are aiming to agree a new framework by the end of 2020.

However, OECD officials admitted last week that there is disagreement around whether the so-called pillar one rules, which re-allocate taxing rights, will apply to all multinationals or only to digital companies. The US and China remain opposed to the proposed carve-out.

A small number of countries also advocate delaying the tax negotiations by a year.

Pascal Saint-Amans, OECD

Speaking during the organisation’s quarterly Tax Talks webcast, Pascal Saint-Amans, head of tax at the OECD, said he still expects the Inclusive Framework countries to come to an agreement at a meeting expected to be scheduled for mid-October. A planned meeting in Berlin in July has been cancelled due to public health concerns.

It would be a reasonable expectation, Saint-Amans speculated, that the adoption may still take the form of a staged process leading into 2021.

The OECD tax chief warned that the pandemic had increased the risk of countries imposing their own digital services taxes without internationally agreed rules. This would provoke further trade conflicts as the US is threatening tariffs on countries that are imposing taxes on what are predominantly American digital companies, like Amazon or Apple.

Under pillar one, countries are negotiating 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.

Pillar two aims to address the remaining issues around base erosion and profit shifting and set a minimum level of tax for international businesses.

The pillar two proposal is taking aim directly at jurisdictions like Cayman, which have no, or low, levels of corporate tax. Cayman Finance CEO Jude Scott criticised the rules last year, calling them “an attack” on the Cayman Islands.

He said the proposal would give countries the right to unilaterally assess penalties purely on the basis that a zero- or low-tax jurisdiction is involved, irrespective of whether profits have been properly consolidated, reported and taxed in other jurisdictions.

Saint-Amans noted there was much less disagreement over the pillar two proposal. The COVID-19 pandemic and the resulting pressure on public finances had only raised the countries’ interest in a minimum tax for the profits of multinational groups.

A preliminary economic impact study by the OECD found the new digital tax rules would largely shift where taxes are due and raise only a small amount of additional revenue. The global minimum tax plans, in turn, would raise the lion’s share of the expected $100 billion per year. This would be a 4% increase on current corporate tax revenues.

An updated impact assessment, reflecting the effects of the COVID-19 pandemic, will be published this summer. However, Saint-Amans said, some countries are resisting the public release of the findings.

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