G-20 crackdown could create a new kind of tax haven

LONDON – A landmark deal to close cross-border tax loopholes is unlikely to succeed in removing the incentive for some of the world’s largest companies to shift profits overseas, experts told CNBC, calling the proposed reform “shockingly” unfair for low income countries.

It comes shortly after G-20 finance ministers backed a plan to ensure multinational corporations pay their fair share of taxes wherever they operate. The pact, championed by the Organization for Economic Co-operation and Development, should establish a minimum overall corporate tax rate of 15%.

It aims to reform the global tax system to adapt it to the digital age and is likely to impact companies such as Amazon, Google and Nike, among others. The goal is for world leaders to finalize the deal at an October summit in Rome.

French Finance Minister Bruno Le Maire called the deal a “unique tax revolution in a century”, saying: “There is no going back”. US Treasury Secretary Janet Yellen said the support of the world’s top financial officials showed that “multilateral collaboration can be fruitful.”

So far, 132 countries have joined the “Inclusive framework“, although several countries are known to have serious reservations about the terms of the agreement.

Alex Cobham, Managing Director of the Tax Justice Network, described the OECD’s discussion and agreement on the global minimum corporate tax as “historical, but which does not lead to just and effective reforms. He warned that the deal in prospect would give, “shockingly”, the lion’s share of revenue to the largest members of the OECD at a time when low-income countries are already losing the largest share of revenue to tax revenue. corporate tax abuse.

When asked what the OECD proposal is likely to mean for the future of tax havens, Cobham told CNBC by phone: “The corporate tax haven element will be almost complete.”

“There will always be some incentive to change because if you pay 25% in country X then 15% is even better, but the way the headquarters countries capture the revenue under this proposal means that you would transfer efficiently. your profits in the United States or France rather than wasting your time – and your money – moving them to Ireland or Bermuda along the way, “he continued.

“So this will really be a radical change in terms of the business model of tax havens for companies. It will not be the absolute end, but the more precisely the agreement is defined, the more comprehensively this economic model will be completed. “

Profit shifting is a practice used by some multinational companies to pay less tax than they should. To do this, companies shift the profits they make in major markets such as the UK, where they manufacture products or sell goods or services, to low-tax countries like Ireland and the jurisdictions. of the Caribbean. This profit is then taxed at a very low rate – if at all – depending on the corporate tax rate in that country or jurisdiction.

Economists believe countries are lacking a total of more than $ 427 billion in taxes each year resulting from international corporate tax evasion and private tax evasion.

To solve this long-standing problem, the OECD has proposed a two-pillar solution. The first pillar is aimed at the 100 largest companies in the world, with global annual turnover of over $ 20 billion. The levy will apply to profit margins of companies above 10%.

Experts and economists fear that this pillar will only apply to a small portion of the profits of relatively few companies and that most countries, especially low-income countries, are unlikely to recoup the revenues they they could lose existing taxes on digital services.

One of the conditions of the first pillar is that countries would only have access to the new distribution of taxing rights by removing all existing unilateral taxes on technology companies. Some countries are reluctant to do this because taxes on digital services may cover more businesses than the current first pillar agreement. In some cases, countries could collect more revenue from taxes on digital services than the OECD proposal.

The second part of the OECD proposal, the second pillar, is the overall minimum corporate tax rate of 15%. It is believed to be much larger than the first pillar and could generate up to $ 275 billion in additional revenue if applied worldwide.

Alongside the Independent Commission for the Reform of International Business Taxation, several countries have however criticized the second pillar for its lack of ambition.

Christian Hallum, head of tax policy at Oxfam, told CNBC by phone that the OECD’s two-pillar framework for international taxation risked “exacerbating existing inequalities” in an already extremely unequal system. He also warned that the pending deal risked normalizing tax rates previously associated with tax havens such as Ireland and Singapore.

“There are still moving parts and things we don’t know about the deal, but from what we know, and I would call it an educated guess, the deal will be bad news to some extent. for classic 0% tax havens such as Bermuda and Cayman Islands etc., ”Hallum said.

“Having said that, we have a number of other types of tax havens. We have Ireland, Luxembourg and the Netherlands. Other places that are different in nature, and what we see as a potential effect is what we like to call the “tax haven overhaul”.

In practice, Hallum has said that, in its current form, the OECD framework would see a crackdown on one type of tax haven coincide with increased activity towards other types of tax havens.

“I think what is important to understand about the minimum tax is that it is not a general corporate tax of 15% that will apply everywhere, there are exceptions, ”Hallum said, noting that this likely meant that many companies would be able to pay. “well below the already far too low 15%.”

The “substance carve out” of the OECD agreement allows companies to pay a rate of less than 15% in countries where they have many employees or tangible assets such as factories and machinery.

“This is of course an invitation in our minds to new forms of tax planning and will allow tax competition to continue well below 15%… The basic incentive for profit shifting has not been erased by a 15% floor on corporate tax, ”Hallum mentioned.