Geoff Cook

Geoff Cook

Mourant Consulting | Jersey

Ben Robins

Ben Robins

Partner | Jersey

Global Business Tax

[Dynamic date]

01 June 2021

A Grand Bargain in the Making?

Business taxation has recently made the news headlines following the announcement by US Treasury Secretary Janet Yellen of her support for a Global Minimum Corporation tax of 21%, coupled with a proposal to raise the US domestic corporation tax rate to 28%. The US has committed to funding a $2.2trn domestic infrastructure and social welfare spending plan. And a global agreement on a minimum corporation tax would lessen the chances of US firm inversions and relocation of activities to lower-tax countries, paving the way for the Biden administration to pursue revenue-raising measures at home.

A year's long effort to address the business tax impacts of the digitalisation of the global economy by the OECD's Inclusive Framework has been re-energised. Still, US concerns remain over the unfair targeting of their digital firms, with the EU demanding a reallocation of taxing rights on corporations such as Google, Amazon, and Apple.

The OECD had proposed moving to more market sales-based taxing rights (known as Pillar I) and introducing a global minimum corporation tax at around 12.5% (Pillar II). The proposals respond to changes brought about by the digital economy, where substantial profits arise with minimal market presence. And the locating of intellectual property rights into lower tax jurisdictions can significantly reduce company tax bills.

Under the OECD plans, approximately 2,300 companies would have more of their profits assessed for tax in the countries where they make their sales, and these profits would be subject to a minimum rate of taxation. The proposals aim to apportion taxing rights more evenly between countries and discourage profit shifting.

The US proposals pitched as a countermeasure to a race to the bottom on corporation tax rates, impact the 100 largest multi-national companies, as determined by revenue and profit margin thresholds. The proposals concede changes in taxing rights to a more market-based system but are subject to a minimum corporation tax rate of 21%, much higher than that envisaged by the OECD.

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Closing the Gap

The US and OECD regimes share standard features, such as increasing business contribution to the post-pandemic recovery and arresting a general decline in corporation tax rates. But there are essential differences, and the gap will not be easy to close. Any country with a corporation tax rate higher than 21% is likely to be sympathetic to the US approach. The OECD has expressed confidence in reaching an in-principle agreement by the summer buttressed by qualified support from France and Germany. In contrast, EU lower-tax countries such as Ireland (12.5% CT) and Hungary (9% CT) will see the proposals as undermining their ability to compete with larger countries.

The EU itself has plans for an EU-wide digital sales tax to support its central budget. Given US insistence that its big digital firms must not be the subject of targeted taxation, it will be hard to square this particular circle. A further issue is the profit margin threshold set by the US at 10%, which fails to net large but lower margin companies such as Amazon. Expect the EU parliament to push back firmly.

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Implications for Small State IFCs

There has been speculation that the US and OECD plan aims to limit small state IFCs such as the British Crown Dependencies and Overseas Territories (CDOTs), requiring them to overhaul their tax systems. Still, there is scant evidence to support such a view.

The US and OECD proposals target the most significant global trading companies without differentiation by sector, with US domestic and EU markets being the main focus. The changes made through the OECD Base Erosion and Profit shifting measures, the EU's economic substance requirements, and the US GILTI tax mean that British centres with limited treaty networks are already an unattractive proposition for hosting this kind of business.

As ready adopters of international standards, there is little doubt that the CDOTs will subscribe to any new global standard on corporation tax in their capacity as OECD Inclusive Framework members. Still, the significant impact of such changes will be elsewhere.

The CDOTs primary role is the packaging and distribution of international investment capital taxed in the investor's hands. There is a universal agreement between the major players, including the US and the OECD, that this activity should not be in scope. It supports wealth and job creation and will be a crucial enabler of pandemic recovery efforts.

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