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This resolves one international tax mystery, but raises another set of questions.
It turns out that *France* proposed the trivially low 12.5% rate for a global minimum corporate tax...
https://twitter.com/JohanLangerock/status/1382641937681879044
It turns out that *France* proposed the trivially low 12.5% rate for a global minimum corporate tax...
https://twitter.com/JohanLangerock/status/1382641937681879044
It has long been something of a mystery why the OECD secretariat pushed 12.5% in the 'pillar 2' discussions.
One theory went like this.
One theory went like this.
The secretariat were committed, or saw the commitment of some major member states, to keep pillars 1 and 2 together. But pillar 1 (as the secretariat proposed it) needed treaty change, meaning Ireland etc could block. So to minimise that risk, pillar 2 had to be 'acceptable'...
...and for pillar 2 to be acceptable to Ireland, this theory went, the minimum rate could not exceed Ireland's statutory rate: 12.5%.
It doesn't really make sense though. Profit shifting to Ireland (and equally to Netherlands, Lux, etc) doesn't depend on the statutory rate - but on the effective rates that are actually achievable, which are much nearer zero.
And so there's no real reason for corporate tax havens to be bothered about a rate of 12.5% in particular - if a global minimum tax was effective, even 12.5% would dramatically increase what was being paid by their profit shifting clientele.
So it makes sense now that to hear that it was France proposing the very low 12.5% rate. This wasn't about a strategy to keep havens on board, but - it seems - about the resistance of a major OECD member to higher effective rates on (their) multinationals.
And it also follows - given all that we've heard from lower-income countries in the 'Inclusive' Framework, about how their voices are simply ignored - that the secretariat would have responded on this point not to Ireland etc, but to their own host country and G7 member, France.
This sheds some light on another small mystery too.
US intervention has likely saved the OECD process from an ignominious end, after missing the 2020 deadline, and with most OECD members unenthusiastic (complex proposals, small projected revenues). And yet...
US intervention has likely saved the OECD process from an ignominious end, after missing the 2020 deadline, and with most OECD members unenthusiastic (complex proposals, small projected revenues). And yet...
And yet: we hear voices talking about much lower rates (15%-18%) than the 21% Yellen+Biden propose; and we hear arguments that the global minimum tax should not be a revenue-raiser (that being the 'mandate' for pillar 1 instead).
This all makes sense, if we (1) read the negotiations as a G7 internal issue, not a wider OECD one; and (2) see France, Germany and perhaps others not as 'committed to progress but thwarted by Trump', but instead lukewarm only about making serious improvements to corporate tax.
OK, if that adds a little clarity to our understanding of the negotiations, the question as ever is: Where do things go from here?
There are two main issues to consider. First, what if anything can be delivered (effectively, by the G7) within the current OECD/G20 process? And second, what happens to international tax rule-setting after that?
On the first question, I wrote a bit here: https://www.taxjustice.net/2021/04/08/300bn-in-new-tax-revenues-weighing-the-us-intervention-in-global-tax-reform/
Most of this stands, but we can go a bit further now...
Most of this stands, but we can go a bit further now...
You can stick a fork in Pillar 1, it's done. There is zero prospect of anything that delivers on the original ambition of going 'beyond the arm's length principle'.
Three possibilities for pillar 1:
i. nothing delivered at all
ii. something so narrow that barely any of the global profit of multinationals is affected
iii. something closer to the OECD proposal, requiring treaty change, which is never really delivered
i. nothing delivered at all
ii. something so narrow that barely any of the global profit of multinationals is affected
iii. something closer to the OECD proposal, requiring treaty change, which is never really delivered
With questions raised over whether the Biden proposal (to focus on 100 multinationals only) would capture some of the most high profile companies, notably Amazon, this starts to look a difficult sell. But equally, the OECD proposal has few supporters, hence the process stalling.
The Biden proposal has the attraction that it can be delivered by firm-specific agreements that don't require treaty change, so you could say that you're going to do it, and then see if much of anything happens. And that might free up space for agreement on pillar 2...
On pillar 2, there are two major issues to resolve: what rate, for a global minimum effective tax rate; and who gets to tax the undertaxed profits that are identified?
The answers to these are critical to everything else. This *could be* an unprecedented step forward; or not.
The answers to these are critical to everything else. This *could be* an unprecedented step forward; or not.
On the rate: agreement on 21% (or higher - e.g. @ICRICT recommends 25%+) would be dramatic. This could raise, under the OECD approach, some $540bn in additional annual revenues, the great majority of which would go to OECD member countries.
On the distribution of the rights to tax the undertaxed profits: the OECD approach privileges headquarters countries, including US, over host countries, so most lower-income countries get very little in comparison.
Apart from being demonstrably unjust, this may also conflict with the intention of the Biden administration - who are proposing to change the US rules in a way that facilitates a different approach to headquarters vs host countries.
The alternative is our METR proposal - which follows great technical work of the OECD secretariat to identify undertaxed profits, & then taps original spirit of pillar 1 and apportions the undertaxed profit according to the location of real activity (sales and employment).
The result is that the METR with 21% rate would raise a projected $640bn a year: a bit more for OECD countries, and much more for lower-income countries - towards an additional 30%-40% of CIT revenues for both groups on average.
More on the METR: https://www.taxjustice.net/2021/04/15/the-metr-a-minimum-effective-tax-rate-for-multinationals/
More on the METR: https://www.taxjustice.net/2021/04/15/the-metr-a-minimum-effective-tax-rate-for-multinationals/
Where will the G7 come down on these issues? The UK is chairing this year, and has so far refused to offer any great support for the Biden proposals. France and others in the EU, per the above, may not be enthusiastic on a major reform, despite previous noises.
Set against that, the Biden administration is highly and publicly committed, including as part of the domestically-aimed package of its 'Made in America tax plan'; and still in its honeymoon period, with others keen to make friends and catch a little of the halo.
The OECD secretariat really needs an outcome, in light of the existing delay and the growing pressures it faces. These relate to concerns that it has been unable to generate proposals that would yield the necessary scale of progress - and pandemic-appropriate revenues...
...coupled with concerns over the incoming new leadership (Australia's Mathias Cormann, with a track record on both tax and climate in which the word 'denial' features more often than the organisation might like)...
...and the growing momentum to shift international tax rule-setting to a globally inclusive setting at the United Nations https://www.taxjustice.net/2021/02/25/a-tide-turning-moment-in-the-global-struggle-for-tax-justice/
Which brings us nicely, and finally, to the last issue: what will happen *after* the OECD delivers a deal, or doesn't, at the June G7/July G20 meetings?
Consider three scenarios:
i. Globally beneficial success! (High minimum tax rate, with benefits shared fairly under METR proposal or similar)
ii. Narrow deal, limited benefits outside G7/OECD members
iii. No deal
i. Globally beneficial success! (High minimum tax rate, with benefits shared fairly under METR proposal or similar)
ii. Narrow deal, limited benefits outside G7/OECD members
iii. No deal
In the first of these, you could really make an argument that the OECD had delivered. The scale of additional revenues, and the full inclusion of lower-income countries outside the OECD, would make a powerful argument that the global architecture is working.
In the second and third scenarios, where the OECD either doesn't deliver at all or doesn't deliver very much, and especially not for non-members, the added momentum to shift the rule-setting power away from the club of rich countries may quickly become irresistible.
That could go two ways. Enough OECD members could share the disillusionment that they stop blocking the start of negotiations on a UN tax convention - which would set ambitious transparency and cooperation standards, and also set a basis for intergovernmental negotiation at UN.
Or OECD members could continue their current blocking of UN progress, and effectively commit the world to a sustained period of unilateral mechanisms (far beyond DSTs), and the further splintering of tax rules for multinationals worldwide.
The fact that senior OECD figures have been quite public recently in their attacks on the UN is a reflection of the pressures the organisation faces. And on balance, it's a good thing - this is one of the defining arguments about global tax justice, and it needs to happen openly.
The OECD can argue that things move slowly at the UN - but that's harder to sustain when the UN tax committee has just delivered a treaty article on tax and digitalisation, before the OECD and despite OECD members trying to block it.
