Global tax system chimera or reality?
In the following article we want to present the 7 adversities that the Global tax system must currently face to move forward and be able to materialise.
During this month of October, what is possibly the most ambitious global fiscal agreement to date is being negotiated. The objective of this agreement, as we mentioned in our previous article, aims to implement a minimum tax of at least 15% globally. This tax aims to address the tax engineering used by multinationals, preferably in the technology sector.
As a result of this global tax agreement, the ones mainly affected by these measures are American companies such as Apple, Facebook, Google… In this new article we want to expose 7 difficulties or adversities, among others, that currently have the agreement to advance and implement, because as they say, one thing is theory and another, practice.
Points to consider in negotiations:
These negotiations have been driven by the G7 and are being overseen by the G20 and the OECD. However, as we mentioned, there are certain complications in the way for this global tax system to be applied uniformly and with the intended objective. As we will see below, there are several actors involved and aspects that are not being taken into account at the negotiating table, at least according to the latest publications. That is why we want to explain and expose some of these details:
1. Congress of the United States of America:
As we said, there are several actors that have some voting power and importance in the decision-making of this new global fiscal agreement. One of them is the Congress of the United States of America that has yet to approve or deny the negotiation of the agreement to be carried out by the Joe Biden’s administration.
As of today, the negotiations are being complicated for the Democratic side. And they will ask, why? In order to get approval, it is necessary that two-thirds of the Senate approves the progress in the negotiations, which today is complicated. Despite the fact that the Senate is favourable to the Democrats by a few votes, there is a large percentage of the United States Congress of America (mainly Republicans) that is quite sceptical of such a measure. The main stumbling blocks in the first talks between Democrats and Republicans are two aspects:
- a. The Republican side believes that the countries or territories most affected by these measures will not withdraw their taxes on digital services (ISD), even if an agreement is reached for the “global and general benefit of all”. According to some analysts, applying the global tax system would be a loss of revenue compared to ISD, understanding that these countries would collect less with the global agreement than with their own system based on ISD.
Janet Yellen, secretary of the treasury of the United States of America argues that this aspect is being negotiated and it is intended that these national taxes be withdrawn as soon as the agreement is implemented. Mike Crapo, Republican senator on the finance committee, recently said “It would be unacceptable for the United States to endorse any agreement that would allow DSTs or similar unilateral measures to continue to be imposed on U.S. companies”;
- b. Another Republican senator argued that they are not in favour of the global tax deal, as he does not consider it fair for the United States to pressure other countries to join the agreement. In the words of Texas Republican Rep. Kevin Brady “I worry [about] her begging other countries to raise their tax rates, because America is voluntarily making ourselves so uncompetitive, I worry about the dynamics there.” . As we can see, the Republican side considers that the problem is not that multinationals pay taxes in other low-tax territories, but that the United States is losing competitiveness and fiscal attractiveness to the world.
2. Brussels – Europe:
Brussels has been pondering for years the initiative to try to implement an update of tax rules at a global level as a result of the multiple scandals and leaks of information by the International Consortium of Investigative Journalists (ICIJ) on the tax evasion of large multinationals and European personalities towards territories of low taxation. The best-known cases are: Panama Papers, Pandora Papers, Luxleaks, Offshore Leaks…
The conflict is evident within the European Union since, on the one hand, we have countries such as Germany, France and Austria that call for reforms or the implementation of fiscal measures. This is to counteract the financial engineering of multinationals and on the other hand, countries such as Ireland, Cyprus and Malta that consider it a frontal attack on their future economic growth.
This dispute has not yet been resolved, and any change in the EU tax regime should be in line with the upcoming global reform, always bearing in mind that it will require the unanimity of all member countries. The main question is whether the small and lower-taxed countries of the European bloc would agree to join the agreement and raise the minimum threshold to 15% under the agreement being negotiated. Thus losing attractiveness and its economic and fiscal competitiveness;
3. Fiscal Competitiveness:
One of the reasons behind this agreement is to reduce fiscal competitiveness between small countries and large powers. Even with the implementation of such an agreement, small countries would gain. The average tax rate (Corporation Tax) in the countries that make up the G20 is 21.8%, applying a minimum of at least 15% globally does not solve or reduce tax competitiveness between Germany and Ireland.
The problem still exists, because a German company whenever possible, prefers to pay 15% in Ireland than 30% in Germany. The same happens with other companies from different countries belonging to the G20 such as: Spain where 25% is taxed; France at 32 per cent; Japan and Germany at 30%; Italy at 28%; Canada at 26%… among many other territories where taxation is higher than the minimum that is intended to be required.
4. Effective or nominal tax rate?
Another aspect of which there are not many details is about what tax rate taxation is based on. Will it be an effective or nominal tax rate?
The effective tax rate would be applied to the profits generated, on the other hand, the nominal tax rate implies that it is the State who chooses what the taxable base is regardless of the economic performance of the company. They are different criteria! For us to understand each other, imagine that a company earns 10,000 euros of profit, but a nominal tax rate is applied in the Corporation Tax, it is established that its taxable base is 10% of the total, understanding that the other 90% correspond to tax credits, deductible expenses …
This company would pay 15% of 1000 euros, which would be about € 150 of taxes, while another company with the same profit in a country with a corporate tax of effective type will pay 15% of 10 000 euros, which would be about € 1 500.
As we can see in this example, the difference can be abysmal between countries. It is clear that conditions or certain rules can be implemented that promote tax harmonization between all territories, but as we have seen, rules and / or internal laws imply rebates and bonuses that reduce the tax quota at the end of the year can be introduced a posteriori.
5. Deductions and accounting differences
The realization of an agreement at the regional level is a laborious process in itself, let us not imagine an agreement at the global level. As we mentioned, there are several actors and casuistries that are not being taken into account. Although the G7 agreement platonically aspires to all multinational companies paying an effective rate of 15%, in practice the homogenization of criteria for determining the tax base on the basis of the accounting result is an obstacle that is difficult to overcome.
Each territory has its own system of deduction of expenses. It differs from nation to nation. In the vast majority, there are differences in how to compute multi-year losses when calculating the tax quota that each company will have to pay and, in short, there are very different positions when it comes to setting what is the formula of the tax base. For example, in Estonia if profits are not withdrawn, they are not taxed.
Malta is another example of this, when the profits are distributed among foreign partners, the government returns 6/7 of what is charged, so that we understand each other, the company ends up paying 5% instead of the 35% stipulated by Maltese law.
6. There are other taxes apart from that of Companies
Corporate tax is just one of the variables that is in the eye of the storm. But, although all the problems that we have mentioned above can be minimally harmonized between all the parties involved in this great global agreement, there are other taxes that are being left out of the main negotiation or at least, have not been mentioned or considered for their regulation.
Among these other taxes we can highlight the IRPF, the VAT declaration, inheritance taxes, property taxes, copyright, capital gains taxes, patent taxes …
The lack of regulation in some of the taxes we have mentioned can lead to reductions in the corporate tax base. This differential could be transferred to other tax bases such as dividends, capital gains…
The transfer of these profits would not imply a greater expense, since it could be the case that in some territories the dividends had a taxation of 0% compared to the minimum of 15% that is to be implemented in the corporate tax, which would be legally circumventing the agreement.
7. Jurisdictions that do not sign the agreement:
Last but not least, we want to highlight a few more aspects:
- a. What will happen to countries or territories that do not intend to join the global tax system?
One of the possibilities we consider is that an OECD-style blacklist be created with the territories or countries that do not join.
Another possibility would be to tax with a new tax the commercial operations carried out by these multinationals from non-collaborative territories.
It would also be possible to limit the commercial activity of multinationals belonging to non-collaborative territories (unlikely).
- b. The negotiations are expected to extend for several months or years until a point of union and balance is found between all the parties directly or indirectly involved. In the case of reaching an agreement, we have to bear in mind that the next US elections are on the horizon, and why do we say it? because according to the latest statements, Donald Trump intends to run again for the 2024 elections, and, if elected, as he did in his previous term, abandon practically all international agreements, among the most prominent: the Paris agreement; the nuclear deal with Iran or the CPTPP among many others.
- c. What will happen to the Free Zone in the different countries that are part of the agreement?
Countries may implement policies or laws to maintain the attractiveness of those trade zones within the country and internationally to counter the imposition of this global minimum. Would Free Zone be disappearing? with difficulty.
- d. What will happen to the States, for example, of Nevada and Delaware?
If the United States is finally part of the global tax system, these states will be forced to raise their tax rates, thereby losing fiscal and economic attractiveness.
The United States will not be able to promote the implementation and adherence to said agreement in a clean and honest manner, when within its own territory there are States that are an exception to the norm. In the event that the United States joins the agreement, these States (among others, Nevada and Delaware) will have to change their fiscal policies, if it were not the case, this situation would not show a real commitment on the part of the United States in the fight against tax engineering applied by multinationals globally.
As we have seen throughout this article, there are several actors involved directly or indirectly. After the last meeting of the parties concerned, we can draw from the official communiqué that the points we have mentioned above are not being dealt with in due depth, nor is the possible unilaterality of the United States or the European Union being taken into account.
In addition, as has been shown in some current examples, the accession of countries to the global tax system does not guarantee that fiscal competitiveness will decrease as intended, since smaller and affected countries can implement new laws to maintain their fiscal and economic attractiveness against the great powers with rebates, deductions and bonuses as we see today.
In short, from what it seems so far, we cannot be very positive about the implementation of this agreement on “Global Tax system” in the short term nor about the possible resolution of the various adversities that it has to face so that it takes effect and fulfils its purpose. And in the meantime, large multinationals and international companies will continue to benefit from widespread tax engineering.