For years and years, the tax world has been tuning into debates around the adoption of the revolutionary pillar one and two, which aim to reduce profit shifting and tax avoidance by multinationals across the globe.
G20 countries and the OECD initiated the BEPS project in 2013. While significant progress has been made over the past nine years, some countries are still cringing over the words “pillar one” and “pillar two”.
Is it because the world is entering a recession, with central banks forced to increase interest rates at record levels? Is it because countries are still combatting the economic effects of the COVID-19 pandemic and potentially facing a new wave? Maybe it’s because world leaders are struggling to mitigate the soaring prices of oil and gas? Or is it because the climate crisis has finally topped the political agenda?
While it might all sound doom and gloom, the OECD pillars one and two – if implemented – expect to generate further revenues for governments. If anything, this could be a great time to adopt the new tax framework.
Each year $240 billion is lost due to tax avoidance by multinationals, equivalent to 4 to 10% of the corporate income tax revenue globally, according to the OECD. That’s a significant sum for countries to regain.
The problem? World economies are too different.
For a start
Let’s take pillar one. If implemented, digital services taxes and other unilateral measures would cease to exist. The pillar would apply to large multinationals, with certain amounts of taxable income being reallocated to market jurisdictions.
Within pillar one is Amount A – developed to also address the issues arising from the digitalisation of the economy – under which jurisdictions would be able to reallocate profit based on where the sales originated from.
Makes sense, doesn’t it? Any country that enabled a multinational to increase its profit should receive a piece of the pie. But there’s a catch. Pillar one would only target multinational enterprises (MNEs) with over €20 billion ($19.4 billion) revenue and with profits above 10% of turnover.
That is a very small scope. This means the OECD pillar would affect just 78 of the largest 500 global companies, according to economic policy platform EconPol Europe.
This would be a lot of hard work for too little money – particularly for developing countries.
Organisations such as the African Tax Administration Forum have already shared their concerns regarding the scope of pillar one and its effects. The rule could create an uneven playing field, which is why the adoption of the tax framework still creates debate today.
The complexity of pillar one has been countlessly criticised, especially in the latest report published by the OECD. Simpler rules would enable developing countries to combat profit shifting and boost tax certainty for their taxpayers and governments.
Sourcing rules, in particular, would be a hell of a job. Taxpayers would have to calculate the amount they were reallocating to jurisdictions and make sure they were attributing the right profit to avoid double taxation. This could create tensions between jurisdictions if not applied properly.
And then…
Meanwhile, pillar two – which aims to impose a global minimum tax of 15% on MNEs with a turnover greater than €750 million ($730 million) – also raises questions.
Developing countries might want to adopt a lower corporation tax rate to attract foreign direct investment (FDI), but 15% seems far below most rates in place.
Countries including Nigeria, Chile, and Colombia, for example, have corporate tax rates ranging from 27% to 35%.
Pillar two is designed to remove low-tax jurisdictions and offer fairer tax competition across the globe, but would it not do the opposite?
The director of the OECD Centre for Tax Policy, Pascal Saint-Amans, stated at a conference last month that jurisdictions would have to – paradoxically – lose some sovereignty in order to strengthen it. But some countries have historically disagreed. The US, for instance, has long criticised the tax deal for strictly targeting American multinationals.
It is difficult to understand how one rule would work efficiently for all. It seems that given the divergence in economies and goals of each country, pillar two could harm the international tax competition currently in place.
Should it not be a political decision, after all, to increase or decrease corporate tax? Should it not be up to political leaders to decide their own strategies for attracting FDI and boosting their GDPs?
The long debate around the implementation of pillars one and two seems to have only created more of an opportunity for low-tax jurisdictions to polish their images and reputations. Until the new tax regime is fully endorsed, as expected in 2024, I won’t believe it until I see it.
