OECD plans for a global minimum tax could seriously halt the economic recovery following the COVID-19 pandemic, according to the National Taxpayers Union.
A draft of the so-called Pillar Two plan for global corporate tax reform showed “ominous signs of the arbitrary, capricious, and administratively complex nature of global tax schemes that NTU has been warning about for several years”, the conservative US think tank said in a brief on the issue.
Under the first pillar of the two-pronged tax-reform proposals, the 137 member countries of the Inclusive Framework on Base Erosion and Profit Shifting (BEPS) are attempting to agree new nexus, or tax presence, and profit-allocation rules. The goal is to prevent companies from escaping taxation in countries where they conduct business but have no physical presence.
While Pillar One targets the tax challenges that arise from the digitalisation of the economy, Pillar Two aims to address the remaining BEPS issues to ensure that multinational businesses pay a minimum level of tax.
According to an economic assessment by the Organisation for Economic Cooperation and Development, the reforms could increase global corporate tax revenues by 4% or US$100 billion.
Most of this additional tax revenue is expected to come from the global minimum tax, which the OECD argues would reduce incentives to shift profits to low-tax jurisdictions and prevent a race to the bottom on corporate taxes.
While the Pillar One plan has seen much resistance from the US government that feels the measures hits predominantly American tech companies, the implementation of Pillar Two was seen as less problematic as it targeted mainly, less powerful, low-tax jurisdictions.
However, this changed, the NTU said in its brief, when a leaked Pillar Two draft showed the challenges that are still ahead.
Aside from the lack of transparency, with no one outside OECD-member governments being able to examine and formally comment on the details of the plan, NTU president Pete Sepp wrote in the brief, the draft also fails to resolve a fundamental conflict between two rules.
These are the rules for the minimum tax burden a company might have to pay in its home country compared with the difference between the effective and minimum tax rate in other countries where it has subsidiaries.
However, integrating the income-inclusion rule and the under-taxed payment rule is important to prevent double taxation.
“The draft states that Pillar Two will give priority to the income inclusion rule over the under-taxed payment rule in transactions, but how it will do so remains a major question,” Sepp wrote, adding that US policymakers grappled with similar problems when they introduced the Global Intangible Low-Taxed Income (GILTI) regime.
Given that a reliable, clear picture has yet to emerge with regard to GILTI, it should serve as a cautionary tale to those who believe OECD’s exercise will provide any further clarity in a global setting, he added.
Other issues could be caused by clashes between US Generally Accepted Accounting Principles and the International Financial Reporting Standard, for example when it comes to whether long-term insurance policies can be classed as revenue.
This was comparable to the debate over the difference between ‘book income’ and taxable profit of a company, which the OECD was not closer to resolving.
The proposed rules also do not address how they affect companies that are subject to GILTI which, it could be argued, established a new minimum corporate tax and was designed to prevent ‘stateless income’ from going ‘untaxed’.
“The fact that the Pillar Two draft continues to leave this question open may be a sign that OECD’s leadership sees an opportunity for a bigger revenue grab in the current COVID-fueled downturn than initially anticipated,” Sepp said.
The brief doubts that the 252-page proposal will lead to simple tax rules. Even where Pillar Two offers some clarification, indicating that companies will have to comply with minimum tax rates on a country-by-country basis, rather than using globally blended rates, complexity will depend on how many countries enact income inclusion rules and under-taxed payment rules.
He added that it was equally troubling that, in contrast to the revenue estimates, there are currently no concrete plans by the OECD to comprehensively assess the financial and compliance burdens of the proposals until after they are approved.
“The dual prospect of $100 billion in tax increases from a multi-country framework and untold millions more in compliance costs cannot bode well for a fragile economy that has just recently shown limited signs of returning to better health,” Sepp wrote.
The OECD, however, is forging ahead with its plans. ‘Blueprints’ for each pillar, outlining the technical details, are due to be presented at the next meeting of the G20 finance ministers on 15-16 Oct.
These are expected to be as close as possible to a document that can be agreed by governments to meet the deadline set for the end of this year. The next meeting of the Inclusive Framework for BEPS will take place 8-9 Oct.