The debate on multilateral taxation, where are we now?
It has been nearly two years since the OECD/G20 published their initial proposals to address the tax challenges arising from the digitalisation of the economy. The objectives of this initiative are to reduce base erosion and profit shifting (BEPS) and to create a framework to support multinational corporations to pay taxes where their profits are generated rather than where their headquarters are located.
The OECD estimates that corporate tax avoidance costs countries over the world around $100-240 billion annually, which is equivalent to 4-10% of global corporate income tax revenues. This occurs mostly due to differences between countries’ tax systems.
techUK has consistently supported a multilateral solution for the taxation of the digital economy. This is a significantly more effective way to tax companies in the modern economy versus national digital services taxes which have resulted in serious trade disputes, do not resolve profit shifting and penalise companies for achieving growth by utilising digital services.
After many years of negotiations, on 5 June 2021, the G7 Finance Ministers met in London to agree the principles of a two Pillar global solution to update the global tax system.
Pillar 1: The largest and most profitable companies, with at least a 10% profit margin; would see 20% of any profit above the 10% margin allocated to market jurisdictions. Therefore, these companies will be required to pay taxes in the countries where they have operations. This pillar also includes a series of additional measures, among the most prominent is the removal of national digital services taxes (DST).
Pillar 2: Proposes a global minimum corporation tax of 15% which will operate on a country-by-country basis.
Chancellor Rishi Sunak described the agreement as 'historic' and appreciated the collective leadership of the G7, adding that this new tax framework has the potential of “creating a fairer tax system fit for the 21st century".
The proposal also seeks to remove uncoordinated unilateral mechanisms to tax the digital economy, such as national digital tax services. techUK has long advocated for a multilateral scheme over national digital taxes and following the G7 agreement the Chancellor reaffirmed his commitment to remove the UK Digital Service Tax (DST) once a Pillar One solution is in place.
Following this, on 1 July 2021, the OECD/G20 published an Inclusive Framework (IF) ‘Statement on a two-pillar solution to address the tax challenges arising from the digitalisation of the economy’. This statement includes key parameters and an expected timeframe for the two pillars solution, as well as providing further information on some of the most anticipated elements of the pillars. At the end of their meeting in Venice on July 10, the G20 Finance Ministers endorsed the statement and encouraged those jurisdictions who had not yet signed the agreement to do so.
As of 31 August 2021, 134 of the 139 countries and jurisdictions have signed the statement on the new two-pillar solution to reform international taxation regulations for the digital economy.
What’s next for the multilateral tax reform?
Participant jurisdictions in the discussions have set an ambitious schedule for the end of the negotiations. This includes a deadline of October 2021 for completing the remaining technical work on the two-pillar strategy, as well as a 2023 implementation plan.
Although the proposal has achieved widespread support, there are still substantial technical and political challenges that jeopardise the two-pillar solution's implementation.
The United States: The US - which made the tax debate a priority during the Biden administration - expressed strong support for the two-pillar solution, particularly the second pillar, since the Global Minimum Tax plan is seen as a step toward achieving its aim of establishing a "foreign policy for the middle class".
However, a surge in Republican opposition to the proposals in recent months has complicated the US president's position, as international tax treaty reforms in the US usually need a two-thirds majority in the Senate, currently evenly split between Republicans and Democrats.
The EU: Tensions in the EU have arisen as Ireland is one of five countries (out of 139) that has not signed the OECD/G20 framework. With a low corporation tax strategy, the country has experienced strong economic results in the past. In the last week of August, on a visit to Ireland, French President Emmanuel Macron stated that he will not pressure Ireland to sign the agreement, but he stressed that the proposed multilateral tax framework “makes sense in terms of cooperation. It makes sense in terms of the EU".
Other EU nations that have not signed the agreement are Estonia and Hungary, both of which have significant opposition to a Global Minimum Tax, making it more difficult for the EU to have a unified position on the agreement by October.
China: with a standard corporation tax rate of 25% (which is reduced to 15% for some qualifying high-tech companies), China signed the agreement as having "ample room" to absorb a global minimum tax and only expressed concerns on tax sovereignty issues.
As the negotiations come to a conclusion, techUK will continue to closely monitor the debate on multilateral taxes for the digital economy, working closely with the OECD and the UK government to provide input and feedback from our members.
A previous call to action by techUK and other tech sector trade associations for a global agreement can be found here. If members have further questions about techUK’s tax work, please reach out to [email protected].