Governance, risk & compliance
The second pillar looks to stamp out tax havens by putting a minimum ‘floor’ of 15% on corporate tax. It’s intended to target multinationals with consolidated revenue of more than €750m. The pillar provides jurisdictions with the right to impose ‘top-up’ taxes on a company if a primary jurisdiction has not fully exercised those rights.
A “tectonic shift” in geopolitics The deal follows years of wrangling at OECD and G20 level over how to level the cross-border taxation playing field. Pressure for a resolution had intensified in recent years, after European countries threatened to impose a digital tax on multinationals. Panayiotis Nicolaides, director of research at the EU Tax Observatory, says the breakthrough came after the election of Joe Biden as US president – a “tectonic shift” that saw a renewed appetite for change after global efforts stalled during the Trump era. “What we saw during the Trump administration was a reluctance by the US to negotiate a deal because it was perceived to be against the interests of American multinationals,” says Nicolaides. “What the Biden administration did was go back to the negotiating table and try and unlock the deal.” The result was a G7 agreement that subsequently triggered G20 and OECD negotiations. It represented a coup for the Biden administration, not only on a geopolitical leadership level but also economically. Nicolaides says the deal is closely aligned to American interests, giving the government a larger share of US company taxes that are currently being spread elsewhere. It should also see the European digital services tax – which would have hit US tech giants – dumped.
The agreement represents a belated attempt to drag the tax system into the age of globalisation. “One hundred years ago, when the original treaties were negotiated, they did not take into account businesses that now operate in a globalised world where they can have production in one country and sell products in another,” Nicolaides explains. “It’s much easier now for firms to have markets everywhere in the world while booking profits in different countries. What this deal is trying to establish are new taxation norms where these new forms of production are taken into account.” While the deal may have been brokered by the top seven economies, it was never going to function without wider buy-in. Key to its success so far has been the signatures at the OECD level, encompassing over 130 countries and jurisdictions, and representing over 90% of global GDP. That, says Nicolaides, is enough to give it the teeth it needs to be workable regardless of whether a few low-tax outliers continue to hold out.
Chief Executive Officer /
www.the-chiefexecutive.com ‘residual’ profits Remaining
20–30% of residual-profits re-allocated to the countries where MNE’s users and customers are located
Country A
International Headquarters
Country B
Country C
“Once you have 100 countries signing, or the bigger countries being part of the deal, you have a shift in norms such that it makes it very, very hard for countries not to be part of it,” says Nicolaides, citing a hypothetical corporate tax scenario whereby a multinational doing business in Germany is based in a so-called tax haven. “The treaty creates a right for Germany to say to this multinational company, ‘OK, you must pay in Germany the additional five or 10% you are not paying in the other country’.”
Under Pillar One, taxing rights on more than $100bn of profit are expected to be relocated to market jurisdictions.
“Companies will have reputational issues as well as enforcement issues, so it will be very difficult not to share this data.”
Nicolaides concedes the measures may not necessarily cancel tax competition altogether, but they would reduce their appeal and halt what he calls a “race to the bottom”.
The need for international cooperation The finer points of how the deal will work in practice – and its various rules, exclusions and scopes – were still being ironed out at the time of writing. Precisely how countries will keep tabs on exactly what is and isn’t being taxed in other jurisdictions was still largely unknown. “This is a key concern,” emphasises Nicolaides. “We don’t yet know exactly what the regulations would demand from multinationals, but I would be very surprised if they are asked to disclose their activities in other countries and big firms don’t do it or don’t do it quickly. Companies will have reputational issues as well as enforcement issues, so it will be very difficult not to share this data.” Nicolaides adds that international collaboration – which the OECD has promoted heavily – will be key. “Already there is an increase in cooperation between
$100- $240mn
The amount the OECD estimates corporate tax avoidance costs countries annually.
OECD 15
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