Industry divided on international tax harmonisation

Industry divided on international tax harmonisation

Governments have different priorities for coming to an agreement over globalised taxations, while industry warns of hazards as well as benefits

The Biden administration has re-ignited negotiations on global corporate taxation in the past few weeks, with proposals that have fanned growing expectations of a deal being reached before the end of the summer. In the UK, tax and accounting professionals believe a deal is increasingly likely, but its benefits – greater certainty for companies, a bigger slice of the pie for the Treasury – will be leavened by a need for companies to re-structure, and a sharp increase in compliance.

The US circulated its own plans for global taxation at the beginning of April to countries participating in ongoing OECD Base Erosion and Profit Sharing (BEPS) talks. On Pillar One, which seeks to find a more equitable way of taxing the world’s biggest digital companies, it proposed that the scope should be extended beyond the digital economy; and on Pillar Two, which advocates a global minimum rate of corporation tax, the US proposed setting that at 21 percent.

“The Biden Administration’s strong support for the BEPS 2.0 project really has re-energised the global discussions,” says Barbara Angus, EY’s Washington DC-based global tax policy leader. “The OECD’s target of reaching agreement by mid-2021 had seemed quite ambitious to many when it was set last October – but now it seems very likely that the countries will come together on a conceptual agreement before the July G20 Finance Ministers meeting.”

On the face of it, the UK and US authorities are approaching the negotiations from opposing viewpoints. Put crudely, the US is keener on Pillar 2, introducing a global minimum tax, because it wants to increase taxes on US companies and doesn’t want to be undermined by low tax regimes elsewhere. The UK’s stated priority, meanwhile, is to make the biggest digital companies, largely US-based, pay their share of tax in the UK. Yet the two may not be so far apart.

“The UK, when we were in the EU, was very hostile to tax harmonisation,” says John Cullinane, director of public policy at the Chartered Institute of Taxation. “But although we have promoted a low tax agenda over the years, we are currently putting corporate taxes up, and so the Treasury may be secretly delighted to have international cover for this volte face in British policy.”

And Tim Sarson, a partner specialising in international tax at KPMG, says: “Before the pandemic we were on a trajectory down to 17 percent corporate tax, so we would have been the large economy probably with the loudest voice most adversely affected by this. But with our rate going up, I’m not sure that’s the case anymore.”

The biggest losers from a global minimum tax rate would be low tax countries like Ireland, Luxembourg and Switzerland, it’s generally agreed, where multinationals are happy to be domiciled and channel profits through with the help of transfer pricing. Net winners would be countries with higher tax rates where digital services are sold or used but little tax is paid. However, the UK’s Patent Box scheme – which offers a lower tax rate of 10 percent to companies investing significantly in R&D – could be jeopardised by a minimum global rate.

Maggie Cooper, lecturer in management accounting at Henley Business School suggests there are reasons why the UK Government is reluctant to publicly embrace a global minimum tax rate: “It could be that they are under pressure from UK overseas territories and crown dependencies who rely on their low or no tax offerings to attract businesses to locate there.”

Nevertheless, she thinks the US Government’s proposal of a 21 percent rate is no more than “an opening gambit”, and the US Treasury does appear to have acknowledged that; it recently said companies should pay at least 15 percent tax on their profits, which could be pushed higher at a later date.

The Pillar 1 proposals, meanwhile, are unlikely to affect many UK companies initially, but should prove of net benefit to the UK Exchequer, and if implemented would open the way for the UK Government to repeal its Digital Services Tax, against which the US has threatened to retaliate. Matt Stringer, director of corporate & international tax at Grant Thornton, says it remains to be seen whether that would result in digital players paying more tax, but adds: “The proposals would certainly allocate a greater proportion of the tax base to customer jurisdictions, away from traditional IP owners and toward more active consumer locations.”

It’s clear that any deal on global taxation agreed in the coming weeks will present a number of implementation issues. Aamer Rafiq, global lead on transfer pricing at PWC, says one of these is “who surrenders the taxing rights that are shifted to market economies, and how this interacts with existing transfer pricing guidance and models?” Another is how to get countries to buy in “if different tax administrations disagree on the calculations about what may be due under the Pillar 1 tax”. These challenges existed before the US proposals and will need to be tackled before any implementation can occur, says Rafiq.

For tax and accounting professionals, a new global deal of taxation will create plenty of work, says Sarson. “With any big international tax changes, you go through a few phases,” he explains. “Early phases are around helping our clients to model what the impact might be, and to do a bit of scenario planning.” Once the big implications have sunk in, companies will need advice on two key fronts. “One is to help them restructure and to rethink their operating models to deal with the new reality. And then there’s the compliance that comes with it.”

The prize on offer is a new system that creates a more equitable distribution of tax between countries and better reflects the changing nature of economic activity. As many of the participants have put it, that also means reversing the ‘race to the bottom’ whereby countries chase investment by slashing their tax rate.

Barbara Angus at EY points out that there will be some pain in terms of legislating and policing the new system. “The complexity of the rules contemplated would create uncertainty and likely would generate controversy – and reducing that uncertainty and resolving controversies would require the development and implementation of robust new dispute prevention and resolution processes,” she says.

Getting the deal will require compromise and horse trading, says Cullinane, but “there’s probably a lot of feeling that there is some momentum here, and now is the time. So if you want to save the international negotiated set up, this is the time to do it.”

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