Wednesday, January 26

Will global tax reform lead to a fairer tax system?


The new global tax reform framework, the two-pillar solution, is expected to address the tax challenges posed by large multinational companies that pay low taxes.

To date, some 136 countries and jurisdictions representing more than 90% of world GDP have joined the agreement.

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But the details of the solution have yet to be developed. After that, the necessary changes should be made in the tax laws of all jurisdictions that have joined this effort.

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At the recent transfer pricing summit organized by the South African Tax Institute (Sait), its executive director Keith Engel and Lee Corrick, technical expert on tax at the African Tax Administration Forum (ATAF), Diane Hay, director of PwC UK , and Professor Lorraine Eden from Mays Business School USA, discussed where the global tax system is headed.

High-level overview

Pillar 1 deals with the transfer pricing aspect and Pillar 2 establishes a minimum corporate tax rate of 15%.

Corrick got the ball rolling by questioning who will be the winners and who will be the losers in the Pillar 1 solution.

Pillar 1 will only apply to companies with a global turnover of more than 20,000 million euros and a profit margin of more than 10%.

Extractive companies (such as mining companies) and regulated financial services have been excluded from the agreement. Until now, no definition of “regulated financial service” has been provided.

If the agreement goes into effect, the plan will be implemented in 2023.

Calculation of global excess profits to be allocated to market jurisdictions

A “market jurisdiction” is one in which the multinational entity (MNE) obtains at least € 1 million from that jurisdiction. For smaller jurisdictions, with a GDP of less than € 40 billion, the amount is set at € 250,000.

Twenty-five percent of the profits that exceed a profitability ratio of 10% will be allocated to the countries in which that multinational operates (the market jurisdictions).

The Organization for Economic Cooperation and Development (OECD) is also working on developing rules based on the arm’s length principle, which will apply to entities other than so-called digital companies, but this is still in the discussion phase. .

Work is still ongoing on how to provide tax certainty, and it is suggested that all jurisdictions will need to apply mandatory binding dispute resolution to resolve issues related to the allocation of excess benefits. Work is still being done on a binding elective dispute resolution system for developing countries.

A very controversial measure is that the countries that subscribe to this new system will have to eliminate all taxes on digital services (DST) that have already been introduced in their legislation and taxes on so-called technology companies. Some countries feel that eliminating DST for all companies is a step too far.

It should be noted that Nigeria, Kenya, Pakistan and Sri Lanka have not yet signed the agreement of this agreement.

Engel said that administratively it seems like a simple system. But he questioned the extent to which jurisdictions would benefit, given that there could be many jurisdictions.

Pillar 2

Corrick said the rationale for Pillar 2 is to address the remaining base erosion and profit transfer (BEPS) issues associated with low taxes.

Jurisdictions will be given the opportunity to “tax back” group earnings that are subject to a low effective tax rate.

A minimum tax rate of 15% has been imposed. However, a double taxation treaty can override this, and there is also concern about how the additional tax will be distributed between the residence (the resident is taxed on world income) and the countries of origin (the resident is only taxed on earned income. in the country of residence). ).

Corrick noted that African countries are concerned about the impact on tax competition and tax incentives in Africa.

The impact of pillars 1 and 2

Hay commented that a lot will depend on whether Pillars 1 and 2 can be implemented. “I think there is a question mark around whether this will ever see the light of day … so many issues have to be resolved and countries still have to sign it in form of a multilateral convention.

“It sounds simple, but implementation is critical.”

Hay has “seen an ambivalence in the OECD regarding the arm’s length standard.”

She sees this as a signal to countries that they can go beyond the arm’s length principle and beyond the permanent establishment principle.

“This can trigger new types of taxes,” he says.

“I’m nervous about where this is going.”

There is the opinion that if the method of reallocation of benefits is simplified and the procedure of mutual agreement (MAP) can be used, this will mean an improvement.

Eden agreed with everything Hay said. He also noted that “the critical thing is when the OECD secretariat came out and said there were problems with the arm’s length principle.” She has always seen this as part of the tax rules, and that the original BEPS project was to cover these rules. “The gaps were put by those who want to use them.”

It appears that the proposed two-pillar solution does not address the many loopholes that companies use to minimize their taxes.

Hay doesn’t think it’s too big to fail and is skeptical as to whether it will bring about a fairer tax system, and Eden is skeptical as to whether it will achieve the goals it set out to achieve. Engel opined that when the political winds in various countries change over time, they will gradually diminish.


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