The OECD and G20 issued a statement on January 30, 2020, agreeing outline for further negotiations and work on reforming the international tax rules for many larger multinational groups. This raises several issues. What are the likely new rules for multinationals? What will governments do with resulting tax revenue increases – or shortfalls in some cases?
The proposals in a nutshell:
There are said to be two pillars which essentially work on a push-pull basis. Pillar one should push some profit in the market country. Pillar two should pull some profit into the multinational’s home country. The biggest losers would be offshore places where IP (intellectual property) has sprouted. The proposals have a loose resemblance to the Trump tax reform of 2017 in the US. Pillar two is still evolving, so we focus below on pillar one.
Pillar one is a unified approach which changes the income “nexus” rules to allocate a minimum amount of income to market countries: (1) even if the users in the market countries don’t pay, they are merely users with cookies in their computers for analytical and advertising purposes, and (2) even if the multinational operates outside a country from a cloud in cyberspace.
Taxable profit would be measured according to the line of business segments per group financial statements, not those of individual subsidiary companies. Taxable profit would be split into three amounts – A, B and C.
Amount A will be residual profit above a certain level to be decided allocated to market countries according to a formula – but mainly automated digital services and consumer facing businesses with annual revenues above a certain level – perhaps 750 million Euro. And only if there is significant and sustained engagement over a period of years in each market country concerned. (Yes, this sounds vague and muddled…)
Amount B will be a fixed remuneration to be decided for defined distribution and marketing activities in a country.
Amount C will be additional profit for additional activities.
What will be out of scope for Amount A?
Smaller groups or segments, extractive industries, sellers of raw materials and commodities and most financial services.
What happens to profits out of scope of Amount A?
Traditional arm’s length pricing (ALP) will continue to be required between related companies in a group, as modified by recent OECD rules against base erosion and profit shifting (BEPS). These target fulfillment houses and subsidiary companies acting as sales agents, among others. Countries are starting to adapt their tax laws and tax treaties, aided by an OECD super-treaty known formally as the multilateral instrument or MLI.
How will double or multiple taxation be avoided?
Foreign tax credits may apply in the home country. And a system of tax panels is briefly proposed. One panel may be staffed by members from tax administrations, the other would function as a body of experts. The interaction and powers of each is not spelt out, but to speed things up there may be time limits and limited or suspended tax collections for amount C. There would be mutual agreement procedures and there may also be mandatory binding dispute resolution procedures. (Yes, it sounds bureaucratic and not sufficiently clear-cut).
Will the proposals see the light of day?
One government out to avoid any tax revenue shortfall is the United States. On December 3, the US Treasury Secretary wrote to the OECD requesting that US multinationals be allowed to opt into the new rules as a “safe harbor”, but not be compelled to do so.
But 137 countries are involved and many expressed concerns this would be unfair and create uncertainty.
Other issues yet to be negotiated and resolved include: adapting Amount A for different degrees of digitalization; regional factors and dispute resolution to prevent double or multiple taxation.
Our view is that the tax tug of war geopolitics will eventually come out their closet leading to more of the usual cat and mouse planning by taxpayers. Just make sure your business is ahead of the game….
As always, consult experienced tax advisors in each country at an early stage in specific cases.
The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd