IFA 2022: Pillar two about ‘strengthening sovereignty’

Countries must not fear losing their sovereignty when implementing pillar two, but policies need to be revised for the OECD tax framework to be efficient, according to panellists at the IFA Congress in Berlin last week.

Pascal Saint-Amans, departing director at the OECD’s Centre for Tax Policy and Administration, said that countries had “lost their sovereignty” in the world of globalisation due to unfair tax competition.

However, they could regain their power through more robust tax laws.

“The tax paradox is to strengthen the tax sovereignty. To do that, they [countries] have to give up a bit of their sovereignty,” he said during the IFA panel on September 7.

Mechanisms must be put in place to prevent profit shifting and for governments to retain their power of collecting revenue, but tax incentives make it difficult to do so, according to Saint-Amans.

“There is a wealth of debate and questions that countries will have to face. It’s about strengthening sovereignty and removing the ability of some countries to be aggressive and offer tax tools,” he explained.

Despite regulations including the global intangible low-taxed income (GILTI) rule in the US, which aims to tax income earned by controlled foreign companies (CFCs), there remains a sovereignty and compliance issue.

CFC rules are also designed to prevent profit shifting by forcing taxpayers to declare their foreign earnings.

During the same panel, Manal Corwin, principal-in-charge of KPMG’s Washington national practice and America’s regional tax policy leader for KPMG International, said she considers this to be a crucial issue within BEPS.

“The US was suggesting strengthening CFC rules – in the end, the BEPS action plan was a way to get that. CFCs are the province of domestic law,” she said.

“At the end of the day, you end up with something in which countries are looking to collect their own tax. There is a tension with the fact that countries regularly use tax policies to drive outcomes, desirable outcomes,” added Corwin.

This approach “neutralises” the effectiveness of tax policies to achieve these desirable outcomes, according to Corwin.

“The origin and pathway were because of sovereignty and the fact that CFC and tax rates are the problem of domestic law,” she said.

Lisa Wadlin, US-based head of tax at Netflix, also claimed that the US considers GILTI not to be sufficient – or that it leaves leeway for others to tax income.

Pillar two would impose a 15% tax on multinationals with revenues above €750 million ($747 million) – a “high” threshold from a US perspective, said Wadlin.

The implementation of pillar two would also call into question the effectiveness and role of other tax policies currently in place, such as the CFC regime, she added.

ITR also reported on progress made around pillar two, as discussed at the IFA Congress, in this latest article.