Significant step for international tax reform

International Tax Reform

12th July 2021

Following the recent global tax deal to fix a minimum corporate tax rate of at least 15% which was ratified in July at the Organisation for Economic Cooperation and Development (OECD) headquarters in Paris, there can be no doubt that on-going international tax reforms are on the agenda. We consider what this seminal agreement means for all businesses, including global recruiters.

Latest international tax reforms

The new minimum 15% corporate tax rate effectively gives countries the right to collect tax revenue from large companies based on where they earn that income, rather than where they are based. This followed an agreement at the G7 summit in June, which was held at Carbis Bay, Cornwall in the UK, with the deal to introduce and approve a global minimum corporate tax rate being concluded in Paris.

With 130 countries agreeing to this new landmark ruling, there is a strong global consensus in putting an end to what US Treasury Secretary Janet Yellen had referred to as the ‘race to the bottom’. The importance of the accord and the mood was captured by French finance minister Bruno Le Maire, who tweeted, “More than 130 countries, including China, India and Russia have agreed to international taxation at the OECD. It is a historic, ambitious and innovative agreement, unheard of for a century.”

The accord has been a long time in coming. It is the result of negotiations that go back more than 10 years with the OECD pushing hard for its two pillar taxation approach that would provide “much needed certainty and stability to the international tax system”. According to ‘Pillar One’ it would ensure a “fairer distribution of profits and taxing rights” so that organisations pay the tax they owe for income generated in the country of origin, rather than where they book their profits.

The jurisdictional change (‘Pillar One’), however, affects only companies with more than €20bn in annual turnover and pre-tax profits of at least 10%. The hope, especially from European countries, was that this would catch US tech giants such as Amazon who have historically avoided tax. The rule does not affect extractive (such as oil and gas) or financial services industries. According to OECD estimates, this change alone will bring in between $15bn to $17bn in extra tax revenue.

The imposition of the global minimum tax rate is part of ‘Pillar Two’. Although countries don’t have to set their corporate tax rates at the 15% minimum, other countries have the right to make up the difference by applying a top up levy on income generated by companies from countries that have lower rates. To qualify for this minimum rate, businesses must have an annual turnover of €750m as outlined in the OECD’s Base Erosion and Profit Shifting (BEPS) Action 13, which covers transfer pricing. Countries can extend the minimum rate requirement – which is expected to bring in $150bn in tax revenues – to all companies. To avoid arguments, a dispute resolution regime will also be introduced.

‘Historic’ international tax reform deal

OECD Secretary-General Mathias Cormann, summed up the ground-breaking deal, “After years of intense work and negotiations, this historic package will ensure that large multinational companies pay their fair share of tax everywhere. This package does not eliminate tax competition, as it should not, but it does set multilaterally agreed limitations on it. It also accommodates the various interests across the negotiating table, including those of small economies and developing jurisdictions.”

Although many countries, including China, Russia, Saudi Arabia, Turkey and Argentina have now backed the agreement, a minority are still holding out. Tax havens such as Barbados and St. Vincent and the Grenadines, which stand to be the biggest losers, plus Kenya, Nigeria, and Sri Lanka and Hungary, Estonia and Ireland in the EU, have thus far refused. Peru has abstained as it awaits the formation of a new government. The deal will be further discussed at the end of October at the G20 meeting in Rome. It will become law in 2022 with the changes coming into force the following year.

The global tax agenda is proceeding fast and now with the agreement of a global minimum tax rate of at least 15%, multinational enterprises can no longer take advantage of tax havens and divert their profits to lower tax jurisdictions. This is a major landmark ruling not only for not only the Biden administration, but also for the other hundred plus signatories.

Global recruiters placing contractors must ensure that they keep their house in order as international tax reforms continue to be introduced. Anyone involved in the supply of labour overseas could face charges and fines for non-compliance, even if they weren’t directly involved in the fraud.

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