Will we be seeing a significant change in global tax?
Exciting times in the world of tax – changes are happening! Well, at least changes are being discussed. The G7 Finance Ministers, the heads of the International Monetary Fund, the Organisation for Economic Cooperation and Development, and the Eurogroup recently met and signed an agreement on global tax reform which could affect global tax as we know it.
The G7 agreement is based on the OECD’s report to address tax challenges arising from digitalisation of the economy. The report sets out two Pillars: Pillar One addresses the allocation of taxing rights between jurisdictions and proposes new nexus and profit allocation rules; Pillar Two focusses on a global minimum tax.
The G7 agreement has significant implications which could potentially change the taxing rights of many countries and address the shifting of profits. What has been agreed by the G7 in terms of Pillar One is that where multinationals’ margins exceed 10%, the countries where revenue is generated will receive a reallocation of taxing rights on a minimum of 20% of profit, in excess of the 10% margin. Consequently, tax would be paid where economic activity takes place rather than where the revenue is reflected. In terms of Pillar Two, the G7 committed to a global minimum tax rate of at least 15% (previous proposals were 21%). The expectation is that the minimum global tax rate will have a much larger effect compared to Pillar One, as many multinationals are currently benefiting from low tax rates.
What this means is that, as the focus shifts to a redistribution of taxing rights and an economic, market-based approach as opposed to physical presence, the location of a multinational’s headquarters may become irrelevant. This would address a longstanding issue, where multinationals are able to “control” where and how much they get taxed – as we have seen with the Starbucks, Googles, and Apples of the world.
The focus of the new proposals is tax transparency and as such, multinationals that rely on complex structures and especially digital companies will feel the effect of these proposed changes. Digital companies often generate revenue in jurisdictions where their users are based but without having physical presence in these jurisdictions. To date, this has resulted in the market jurisdiction not having a sufficient nexus to tax the profits generated in their jurisdiction. An increased focus on tax transparency is also evident in the European support for the publication of multinationals’ Country-by-Country reporting details which contain sensitive information regarding where the business generates profits, how much tax it pays annually, and how the tax burden is split per jurisdictions (amongst others). Further commitments to making beneficial ownership registers public in the UK for instance, support the notion of tax transparency.
Furthermore, jurisdictions that charge no tax such as the Cayman Islands, Bermuda, and the British Virgin Islands may take big hits. Low tax jurisdictions or countries providing tax incentives such as Mauritius, Ireland, or the Netherlands could also be affected, albeit less so. These jurisdictions would have to keep up their creative ways of attracting foreign investment, beyond being recognised as a “tax-friendly” jurisdictions.
Nothing is set in stone yet and consensus is required in order for these changes to be translated to legislation. It is however evident that tax transparency is a key focus area. Whilst progress may be slow, these changes are worth keeping an eye on and should be included in planning scenarios.
If you would like to discuss this topic and the potential impact on your business, please contact us.
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How you structure your business is a critical question as you expand globally. The right structure will protect your assets, improve your currency position, support your business operations, facilitate future business expansion and changes, and optimise your overall tax rate. Trying to unscramble a sub-optimal structure entered into in haste or without full consideration of relevant facts is complex and expensive, so it’s important to plan upfront.
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