The Organisation for Economic Co-operation and Development’s plan to revamp the international corporate tax system will benefit low-, middle-, and high-income jurisdictions in a broadly similar manner, according to an economic impact assessment report released by the OECD Secretariat.
Although the report does not provide jurisdiction-specific information, individual nations “are very much aware” of how their tax revenues would be affected by the OECD-led proposal to address the tax challenges of the digitalised economy, according to David Bradbury of the OECD’s Centre for Tax Policy and Administration, speaking at an OECD webinar on 20 October. While no country-specific data about the effects of the proposed tax reform has been publicly released, the OECD has confidentially provided nations information pertinent to their particular jurisdiction, he said.
The stakes are high in the continuing efforts of the OECD/G20 “inclusive framework” (a group of more than 135 jurisdictions) to adapt the international corporate tax system to the digital age. The inclusive framework is aiming for political consensus on its global tax overhaul by mid-2021, a timetable that was endorsed by the G20 finance ministers at their virtual meeting on 14 October. The original goal had been to forge an agreement by the end of 2020.
The inclusive framework on 12 October released blueprints of its two-pillar plan to update international corporate taxation and announced that it will hold public consultation meetings in January 2021. Written comments are due by 14 December.
Pillar one of the inclusive framework’s plan would create a new method of divvying up the right to tax the income of certain multinational enterprises. More specifically, the proposal would revise the rules for determining profit allocation and right-to-tax (nexus) to expand the taxing rights of market jurisdictions (eg, the place where the user is located). Pillar two would introduce a mechanism for worldwide minimum corporate taxation, with the objective of reducing profit shifting and tax competition among jurisdictions.
Tax revenue impacts
Addressing the fairness to tax authorities of the inclusive framework’s proposal, the OECD report concludes that the combined tax revenue gains from both pillars of the plan “are estimated to be broadly similar” (as a share of current corporate income tax revenues) across low-, middle-, and high-income jurisdictions.
Most of the increase in tax revenue that is anticipated from tax reform would come from the adoption of a global minimum corporate tax, the report says, because imposing a worldwide minimum tax would significantly reduce the incentives for multinational enterprises to shift profits to low-tax jurisdictions. Curtailing profit shifting, in turn, “would generate revenue gains in addition to the direct gains collected through the minimum tax itself”.
Because no consensus has yet been reached on crucial political decisions regarding the scope and design of the two-pillar plan, the OECD Secretariat’s impact assessment report relies on “illustrative assumptions”. Based on these assumptions, the report predicts that the plan could increase global corporate income tax revenues by up to around 4%.
But the ultimate tax revenue impact will depend on political decisions that so far have eluded consensus. The report is intended to help nations understand how various possible design features and parameters of the tax reform plan would affect them.
On pillar one, the yet-to-be-resolved issues include:
- Determining precisely which business activities would be covered by the new profit allocation and nexus rules;
- Finalising the formula for allocating a portion of residual (ie, “above normal”) profits to market jurisdictions for companies that are considered to be above an agreed profitability threshold; and
- Deciding whether pillar one should be implemented on a mandatory basis or as a safe harbour, as proposed by US Treasury Secretary Steven Mnuchin, whose position would appear to make the pillar optional.
On pillar two, a question remains whether the US GILTI (global intangible low-taxed income) regime would coexist and be treated as being compliant under pillar two, among other issues.
Wider economic impacts
Besides forecasting tax revenue implications, the OECD Secretariat’s report also discusses the two-pillar plan’s anticipated wider impacts on the global economy, which include preventing a significant rise in trade tensions. As the report notes, some nations, including France and the UK, have considered or adopted digital services taxes (DSTs), usually promising to repeal them if the OECD-led effort to reform international corporate taxation is successful. The US has threatened retaliatory tariffs against nations that enact DSTs, which it says discriminate against US-based tech giants. A global agreement on new rules for taxing the digitalised economy is necessary to prevent “an increase in damaging tax and trade disputes”, the OECD report says.
— Dave Strausfeld, J.D., (David.Strausfeld@aicpa-cima.com) is an FM magazine senior editor.