The OECD has a bold plan to impose a global minimum corporate tax rate of 15 per cent. How will the new levy change the world of tax planning? Alec Marsh asks the experts
You won’t have heard of him, but Pascal Saint-Amans may be the most influential Frenchman in the world. As the director of the OECD’s Centre for Tax Policy and Administration, he is the architect of the plans for a global minimum rate of corporate tax of 15 per cent. These are the proposals, you’ll remember, that were enthusiastically embraced by UK chancellor Rishi Sunak and US treasury secretary Janet Yellen at the G7 in Cornwall and then rubber-stamped by the G20 finance ministers just weeks later at Venice in July.
Speaking after the G20 announcement, Saint-Amans told an OECD podcast that the agreement would generate an additional $150 billion in tax receipts from the world’s largest companies – multinationals with a minimum turnover of Ð750 million.
This will be achieved, Saint-Amans explained, by ensuring that the largely ‘untaxed’ foreign earnings of multinationals would henceforth be taxed at an effective rate of 15 per cent, regardless of where in the world the profits were booked. ‘The time when companies could use tax havens, low-tax jurisdictions, the time when companies could use aggressive tax planning – very sophisticated schemes, has come to an end,’ declared the Frenchman. ‘They understand that. We are changing the paradigm.’
At the heart of the OECD’s paradigm-shifting tax initiative is a silver bullet that some believe has the names of the world’s offshore financial centres written on it. It’s certainly not an idea that Saint-Amans is doing much to counter. In the same podcast he added that the agreement would ‘neutralise tax havens without necessarily having them implement the agreement’.
The structure of the tax agreement means that even if a low- or zero-tax jurisdiction declines to impose the 15 per cent levy, then another country can do it and scoop up the revenue for itself. This is because the country in which a given firm is based – in practice where its global headquarters are located – will have the right to impose a top-up tax to ensure that, in total, 15 per cent of global profits are taxed.
Over in the British Virgin Islands, a country of 30,000 people which is home to 400,000 registered active companies, they are prepared for ‘collateral damage on a practical level’. But the British overseas territory is also part of the OECD’s inclusive framework of 139 nations and territories negotiating the new tax arrangements.
‘We are monitoring it, but we feel any effect will be manageable,’ says Lisa Penn-Lettsome, the executive director of international business at BVI Finance, the jurisdiction’s industry body. ‘There will be an impact – it’s not that we are directly impacted as such by having to implement the initiative, but because we have MNEs [multinational enterprises] in our jurisdiction I don’t think we are going to see hordes of professionals leaving the BVI or any of the other jurisdictions.’
Part of the reason for the BVI’s sang-froid is the passing in 2018 of Gilti, an American law with an emotive acronym (Global Intangible Low-Taxed Income Act) that sought to recoup taxes from US corporates’ overseas earnings to offset the value of the massive tax cuts made by Donald Trump at home. Thanks to Gilti, a great many US-headquartered firms with offshore subsidiaries in the BVI (and other places) have already been hit with a tax rate of 10.5 per cent on foreign profits in an attempt to prevent profit-shifting by the biggest US internationals. Places like the BVI will hope that if Gilti’s 10.5 per cent tax rate didn’t cause a stampede, then the new plan for a 15 per cent rate could also be manageable.
Former CEO of Jersey Finance Geoff Cook, now consultant chairman at Mourant, an offshore legal firm, agrees. But he’s not convinced the new global tax won’t have an impact on the role that offshore jurisdictions such as Jersey, the BVI or Cayman play in the world’s financial plumbing: he believes some companies may decide that if their profit margins are low, ‘they might actually decide that 15 per cent is more than they want to pay’. As a result, there could be ‘less activity among trading groups across countries if they were marginal or if they were in a start-up situation and loss-making for a time. They might think about whether that’s viable.’
He thinks the biggest losers will be places such as Ireland, Luxembourg and Hungary – as well as developing countries – that have set their corporation tax levels low to attract inward investment. But any reduction in global business is likely to have knock-on effects.
Economist Mark Pragnell issued a warning at a BVI Finance- hosted roundtable in July that some structuring deals involving BVI companies might not happen, ‘not because the BVI is complicit in some form of tax avoidance, [but] because actually the BVI is probably the place you would put the joint venture in terms of structuring to handle that expansion’. As a consequence he regards the global minimum tax as a step in the wrong direction. ‘This is in the long term not the right thing for the global economy – not the right thing for the IFCs.’ It’s not the scale he’s worried about, but ‘the direction of travel’.
And that’s a pertinent question: what is the direction of travel? With details of the OECD’s global tax due to be finalised in October, Washington will also be considering a new tax initiative of its own from the Biden administration. A law called ‘Shield’– which, believe it or not, stands for ‘Stopping Harmful Inversions and Ending Low-Tax Developments’ – will replace an earlier piece of legislation and work alongside Gilti. Crucially, this will deny ‘corporate deductions’ on fees paid to businesses in low-tax jurisdictions – thereby stymieing US firms’ abilities to set these costs against their tax bills. According to a KPMG report, the move appears to be targeting ‘non-US-parented groups’ because the US ones are largely hit by Gilti already. But further Shield-related proposals include doubling the Gilti tax rate to 21 per cent.
The salient point is that Shield could be news for jurisdictions with direct flights to New York and Miami – in a way that the OECD-led global minimum tax initiative simply isn’t. ‘Imagine if I’m a US company and I’m buying goods or services off a company in Cayman and I don’t get a tax deduction for it,’ declares James Quarmby, a partner at Stephenson Harwood in London. ‘I’m going to stop straight away. If I don’t get a tax deduction I’m paying tax on my expenses, and that’s enough to put anyone out of the business.’
But what really worries Quarmby isn’t Shield, it’s what the EU does with it – and with the new global corporate minimum tax. ‘The real killer is actually EU blacklist,’ says Quarmby, who insists the EU ‘would love to use the cover’ of the OECD’s initiative to blacklist jurisdictions it already dislikes. He notes that since January, EU member states have been obliged by law to impose sanctions on blacklisted jurisdictions, making it more than just a ‘naughty step’.
If every jurisdiction with a corporation tax rate lower than 15 per cent were to be blacklisted, the move would have far-reaching effects. ‘That’s all the overseas territories, that’s all the Crown dependencies, that’s Ireland in there. That’s Luxembourg in there. We’re in a horrible world and I wouldn’t put it past the EU to do that. If it ends up on a blacklist it’s going to affect everything.’
So even though the OECD’s global minimum tax agreement doesn’t legally oblige jurisdictions to impose their own 15 per cent, might certain low-tax or tax-neutral jurisdictions find themselves being forced to do so by the weight of practical considerations? Geoff Cook says he could imagine – ‘push come to shove’ – places such as Jersey introducing it for the segment of firms covered by the proposals (with turnovers north of Ð750 million), or perhaps following the Hong Kong route by introducing a 15 per cent headline tax on a territorial basis, so all earnings outside the jurisdiction are excluded.
The likes of Ireland or Luxembourg might not suffer either – after all, if they swallowed the 15 per cent they would still be lower than the US’s current rate of 21 per cent and almost half Biden’s mooted 28 per cent rate. It would also be far lower than the UK, where the rate is 19 per cent and is due to rise to 25 per cent in April 2023.
Either way, as one well respected international tax adviser made clear, the methods of tax mitigation used in the past – such as the expenses from intra-company royalty payments between overseas subsidiaries (similar to those incurred legitimately between Amazon’s European HQ in Luxembourg and its various country operations, which helped it report a loss in the region last year despite Ð44 billion in sales) – are going to be harder to justify: ‘I think the age of the “paper companies” is getting more and more difficult to sustain [with] those kinds of techniques that we saw in the past.’
None of the tax advisers who spoke to Spear’s have any objection to companies paying the ‘right’ amount of tax – particularly in an age when governments around the world have almost bankrupted themselves in the battle against Covid. But many believe a forced rewiring of the world’s financial system would be economically harmful in the short term and is therefore undesirable. And the prospect of a global minimum tax acting as yet another disincentive for marginal investments in developing countries is another drawback – one that affects some of the poorest people in the world.
What of the shareholders, meanwhile? Wealth manager Max Thowless-Reeves, a partner at Sorbus, believes ‘it’s just a tweak on the spreadsheet’ for the companies concerned. ‘I don’t see it being a material consideration for investors in them,’ he says.
Likewise Russ Mould, investment research director at AJ Bell, is sanguine about the impact of potentially $150 billion in extra corporate tax on companies and investors. ‘It’s a number,’ says Mould. ‘But it’s not a life-changing number or strategy-changing number.’ Nonetheless, once the tax becomes a certainty, analysts will start crunching these numbers – and then the markets might adjust. ‘It’s not an incremental positive,’ notes Mould. ‘It’s a higher cost and therefore that affects earnings per share. Some companies will therefore have less cash flow; they may be more parsimonious with their dividends or share buybacks.’
But will it happen? Will there be a global minimum rate of corporation tax of 15 per cent – for the world’s largest multinationals at least – by 2023? It all depends on forthcoming elections in France and Germany and, crucially, the 2022 US mid-terms, according to the political analyst Tina Fordham of Avonhurst. ‘If we see a shift to non-mainstream political leadership in any of these big elections, then this is probably toast,’ says Fordham. However, given the costs of fighting Covid and public angst about the levels of tax paid by some of the world’s largest companies, the political will and public thirst are there to make corporates pay more. Despite the uncertainty, Fordham reckons that ‘some form of agreement is probable’.
Say it quietly, but it seems that in and of itself, the 15 per cent might not be the end of the world. But what if – at a future G7 or G20 meeting – the finance ministers collectively decide, as indeed they might, that they need more dosh in their coffers? That global minimum could always rise – it wouldn’t hurt any of the big countries who have higher rates anyway – or the turnover threshold could be lowered to widen the net. What we can expect, predicts Mark Pragnell, is internal financial restructuring as companies prepare. ‘The danger for investors, and for the global economy at large, is longer term,’ the economist predicts. ‘With the precedent set that big countries can impose their tax will on other smaller jurisdictions, tax competition between nations is weakened.’ That, of course, is precisely what Pascal Saint-Amans wants.