The international tax deal reached between 137 countries in October will not eliminate tax competition completely, but it will provide limits to this competition. This is according to leading finance and tax policymakers and specialists at a Financial Times (FT) panel discussion.
“I do believe the framework agreement… will still enable tax competition in the future, it will just be inside parameters that I believe are healthy for the maintenance of tax cooperation and better stability with regard to trade in the future,” said Paschal Donohoe, minister for finance, Ireland, and president of Eurogroup.
Within the OECD-led agreement, pillar one provides for the reallocation of MNE profits to market countries, while pillar two establishes a 15% effective minimum corporate tax rate for companies.
“I don’t expect that tax competition will disappear completely. It will probably manifest in different ways around this new floor,” said Janine Juggins, EVP of global tax and treasury at Unilever.
Panellists said that some opportunity for tax competition is necessary in a global economy. Countries should have the right to decide the level of taxes they want to collect as part of their national budgets.
Tax competition can also help to ensure tax rates are not too high for MNEs. “If we have no tax competition at all, I can tell you the result would be worldwide that taxes go up forever,” said Pierre Gramegna, the finance minister of Luxembourg.
However, the global deal will ensure that tax rates do not hold excessive weight with MNEs when deciding where to invest.
Investment incentives
Panellists at the FT discussion emphasised that, while some degree of tax competition between countries is healthy, other aspects of competition can be just as effective for attracting investment. Most businesses want more than a low tax rate to invest in a jurisdiction.
“Tax should not have been the main factor for allocating capital and allocating workers,” said Pascal Saint-Amans, director of the centre for tax policy and administration at the OECD.
MNEs are also concerned with other metrics such as political stability, the rule of law, infrastructure, and access to talent. These metrics could be more emphasised in future as tax competition decreases.
“Companies want to be in countries where they are safe, where they know they pay the right amount of taxation and that is being recognised worldwide,” said Gramegna.
Gramegna said that his home country Luxembourg – a low-tax jurisdiction that has become an active proponent of the OECD global tax deal – demonstrates the importance of factors other than tax for MNEs.
Referring to Luxembourg’s AAA credit rating, political stability, social peace, and predictability, Gramegna said “that is worth quite a lot”.
Donohoe, whose country was initially reluctant to join the OECD deal, agreed that introducing limits on tax competition would not threaten the ability of small, open countries to attract investment.
“I believe [the deal is] in the long-term interest of Ireland, and we want to play our part… in this matter being settled into the future,” said Donohoe.
“Since we entered this agreement, we’ve seen continued evidence of increased investment in Ireland,” he added.
Finance ministers are not the only ones welcoming the global tax agreement. Many in-house tax directors agree that the deal will offer stability to companies operating in the global markets.
MNEs are set to benefit from the deal
Panellists said that the deal is likely to be good for MNEs as well as for countries, despite concerns from taxpayers that companies will lose out because of the agreement.
“I am not sure there are always losers and winners,” said Saint-Amans. “Yes, extremely aggressive companies which have been able to reduce their effective tax burden below 15% would lose in the sense that they will have to pay a bit more.”
“But if you look at the counterfactual, it may be better to pay that minimum than face a fragmented international system,” said Saint-Amans.
For MNEs, the deal should offer an end to unilateral measures that are creating a headache for tax compliance teams, such as digital services taxes (DSTs), although tax professionals have expressed concern that this is not a guarantee.
“One thing is for sure, and that is that the international tax system badly needed reform,” said Juggins. “The number of tax disputes is increasing, and that absorbs time and effort and resources from tax authorities as well as taxpayers.”
Yet, while the deal could be a good thing for companies in the long term, many technicalities of the agreement are not yet clear to MNE tax teams.
OECD should consult with MNEs on technicalities
MNEs could struggle to adapt to the global tax rules if they are not consulted on the technicalities or given enough time to prepare for the changes, according to Juggins.
“I think there is quite a risk of unintended consequences from the way the rules operate, and companies will want to minimise any of those types of effects, where they can reasonably do so,” said Juggins.
Complying with pillar one, the more complex of the two pillars, could require MNEs to make changes to their accounting and tax systems. Yet it is impossible for companies to start preparing until the technical details of the agreement are established.
“What that points to is a very, very short period of time for taxpayers to get prepared for all of this,” said Juggins.
Panellists agreed that future public consultations on the details of the global tax deal need more input from MNEs and other stakeholders. This will ensure that the rules are practical and straightforward to implement, and that companies are prepared in advance.
The closer to the consultations and discussions that a business is, the better their quality and execution will be when adapting to the rules, said Juggins.
Panellists at the FT conference welcomed the global tax deal for allowing a healthy degree of tax competition while shifting the emphasis from tax as an investment incentive to other metrics such as infrastructure and political stability.
MNEs are likely to benefit from the deal because it creates global tax stability and could lead to the end of unilateral measures such as DSTs. However, there is a long way to go in technical negotiations at the OECD. MNEs should be as involved as possible to ensure that business perspectives are heard and that they have enough time to prepare for the coming changes.
