The actions of the G-20 could create a new kind of tax haven

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U.S. Treasury Secretary Janet Yellen looks on during a press conference during the G20 Treasury and Central Bank meeting in Venice on July 11, 2021.

ANDREAS SOLARO | AFP | Getty Images

LONDON – A landmark deal to close cross-border tax loopholes is unlikely to remove the incentive for some of the world’s largest companies to move their profits overseas, experts said. One described the proposed reform as “shockingly” unfair for low-income countries.

It comes soon after G-20 finance ministers endorsed a plan to ensure multinational corporations pay their fair share of taxes wherever they operate. The pact, supported by the Organization for Economic Cooperation and Development, aims to introduce a worldwide corporate tax rate of at least 15%.

It is set to reform the global tax system to make it fit for the digital age and should hit many companies, including Amazon, Google and Nike. The aim is for the world’s heads of state and government to conclude the agreement at a summit in Rome in October.

The French finance minister Bruno Le Maire described the deal as a “one-time tax revolution in a century” and said: “There is no turning back.” US Treasury Secretary Janet Yellen said the support of the world’s top finance officials has shown that “multilateral cooperation can be successful”.

To date, 132 countries have joined the OECD Inclusive Framework, although several countries are known to have serious reservations about the terms of the agreement.

The basic incentive to shift profits has not been abolished by a lower limit of 15% for corporation tax.

Christian Hallum

Head of Tax Policy at Oxfam

Alex Cobham, chairman of the Tax Justice Network, an advocacy group, has called the discussion and agreement on the OECD’s global corporate minimum tax “historic”, but it does not deliver fair and effective reforms.

He warned that the proposed deal would “shockingly” bring the lion’s share of revenue to the largest OECD members at a time when lower-income countries are already losing most of their tax revenues to corporate tax abuse.

When asked what the OECD proposal could mean for the future of tax havens, Cobham told CNBC by phone, “The corporate tax haven element will soon be over.”

“There will still be some incentive to relocate because if you pay 25% in country X 15% is still better, but the way that the countries of the headquarters are recording revenue under this proposal means that you are effectively moving your profits to the US or France instead of wasting your time – and money – moving them to Ireland or Bermuda en route, ”he continued.

“So there will really be a dramatic change in the corporate tax haven business model. It won’t be the absolute end, but the narrower the deal, the more comprehensive the business model will be.”

How does profit shifting work?

Profit shifting is a practice used by some multinationals to help pay less tax than they should. Businesses do this by shifting the profits they make in key markets like the UK, where they manufacture products or sell goods or services, to low-tax countries like Ireland and the Caribbean. That profit will then be taxed at a very low rate – or possibly not at all – depending on the corporate tax rate in that country or jurisdiction.

Economists estimate that countries lose more than $ 427 billion in taxes each year due to international corporate tax avoidance and personal tax evasion.

To solve this longstanding problem, the OECD has proposed a two-pillar solution. Pillar one is aimed at the 100 largest companies in the world with a worldwide annual turnover of more than 20 billion US dollars. The levy applies to company profit margins over 10%.

A view of Piazza San Marco and Palazzo Ducale during the G20 meeting of finance ministers and central bankers in Venice on July 11, 2021 in Venice.

ANDREAS SOLARO | AFP | Getty Images

Experts and economists fear that this pillar will only apply to a small part of the profits of relatively few companies, while most countries – especially low-income countries – are failing to recoup the revenues they may have lost from existing taxes on digital services can.

One of the conditions of the first pillar is that countries only gain access to the new distribution of taxation rights by abolishing all existing unilateral taxes on technology companies. Some countries are reluctant to do so as digital services taxes may cover a larger number of businesses than the current Pillar 1 deal. In some cases, countries could collect more revenue from taxes on digital services than the OECD proposal.

Pillar two is the global minimum corporate tax rate of 15%. This is believed to be of much greater importance than the first pillar and could generate up to $ 275 billion in additional revenue if applied worldwide.

In addition to the Independent Commission for the Reform of International Corporate Taxation, several countries have criticized the second pillar for its lack of ambition.

Kate Barton, EY global vice chairman of taxation, told CNBC’s Street Signs Europe earlier this month that the OECD’s proposal for a global minimum corporate tax rate was a “big step forward” but that there was still much debate to come.

“What’s really interesting here is the timetable,” said Barton, referring to the OECD’s goal of finalizing the terms of the agreement in October and introducing a global minimum corporate tax rate in 2023. “I think that’s really high.”

When asked what the proposal could mean for the future of tax havens, Barton replied, “I think a lot of countries will be rethinking their tax laws and becoming the standard, so it really is a race to the middle.” . “

“There will still be an aspect of how ‘what is the tax regime in this country?” but that definitely makes up for the game, “said Barton.

Increased activity in other types of tax havens

Christian Hallum, head of tax policy at Oxfam, told CNBC over the phone that the two-pillar framework of the OECD in an already extremely unequal system risks “exacerbating existing inequalities”.

He also warned that the deal risks normalizing tax rates previously associated with tax havens like Ireland and Singapore.

“There are still some moving parts and some things we don’t know about the deal, but for what we know, and I’d call it an educated guess, the deal is going to be bad news for the Classic 0 to some extent % Income tax havens. ” like Bermuda and the Cayman Islands etc, “Hallum said.

“But we have a number of other types of tax havens. We have Ireland, Luxembourg and the Netherlands. We like to call other places that are different and that we see as a potential effect the ‘transformation of tax havens’. “

The flag of Bermuda flies in the city of Hamilton, Bermuda, Nov. 8, 2017. In a series of leaks published by the International Consortium of Investigative Journalists, the Paradise Papers highlight the trillions of dollars flowing through offshore tax havens.

Drew Angerer | Getty Images News | Getty Images

In practice, Hallum said that the OECD framework in its current form would coincide cracking down on one type of tax haven with increased activity against other types of tax haven.

“I think the minimum tax is important to understand that it is not a flat 15% corporate tax that will apply everywhere, but there are exceptions,” said Hallum, noting that it would likely mean that many companies would be able to pay “well below the already much too low 15%.”

The so-called “Substance Carve Out” in the OECD agreement enables companies to pay a rate lower than 15% in countries with many employees or property, plant and equipment such as factories and machines.

“This is of course an invitation to new forms of tax planning and will enable tax competition to continue well below 15%,” said Hallum. “The basic incentive to shift profits has not been removed by a 15% floor on corporate income tax.”