Governance, risk & compliance
parent company Country A
Ultimate
Operating subsidiary
Country B
carve-out. All the same, Nicolaides says that the deal, while far from perfect, offers a starting point that is so far workable for all signatories.
“The first step was to establish new taxation norms without getting stuck on the stumbling blocks of the numbers,” he says. “The focus was to agree the main principles and to try and get everyone on board in establishing these new treaties.
The global minimum tax rate would apply to companies with over €750m annual revenue
“The lower you put the threshold, for example, the 10% level or the €20bn, the harder it is for countries to sign off these rules. The same with the 15% – [this] is really not sufficient, in my opinion. Some people might even argue that countries will be forced from already higher tax rates to adopt this 15% level.”
Beyond the deal Low-tax jurisdiction
Under Pillar Two, the global minimum tax, with a rate of at least 15%, is expected to generate more than €150bn in new tax revenues.
$150bn
The amount the pillar two global minimum tax rate of 15% is expected to generate in new tax revenues globally.
134 OECD 16
The number of OECD Inclusive Framework countries and jurisdictions that had signed up to the agreement as of 31 August 2021.
countries – it was one of the pet initiatives of the OECD, the exchange of information,” he says. “And there are country-by-country reporting requirements that demand multinationals disclose activities and that allow tax administrations to exchange this data. We should expect this cooperation to be reinforced as the agreement takes hold.” More broadly, Nicolaides notes that the EU Tax Observatory would be pushing for all taxation data deriving from the deal to be made public. “There is a new regulation at the European level on public disclosure of information of multinationals that will come into force in 2023. We will be advocating for this to happen in other countries.” Other unknowns include how companies will counter the measures – for example, to what extent businesses might be broken down into smaller entities to ensure they fall outside the scope of the deal, making them more tax efficient. Nicolaides suggests that companies would need to weigh up the risks and benefits of such action, particularly in terms of stock market value and any reputational fallout. He says it’s conceivable that companies might spread some elements of their footprint across multiple countries to take advantage of the deal’s ‘carve-out’ provision that negates 5% of tangible assets and payroll from the 15%. The carve-out was a concession to low- tax and developing countries that feared losing multinationals to larger markets if there was no economic incentive to stay. Nicolaides is critical of the concession. “This is an element of the deal that waters down the overall spirit of the agreement and intensifies competition between countries.” The carve-out will also see a reduction in revenue for some larger economies – the EU Tax Observatory estimates the provision could reduce the EU’s share by 15% to 30% relative to a minimum tax without a
The 5% carve-out will eventually rise to 7.5%, and Nicolaides fully expects other numbers to be revised and adjusted to further level the playing field. “These numbers are not enough,” he says, “we are not doing enough in addressing fairness.” He cites taxes on labour as an example. As he explains, very few people pay a tax rate of 15% – most of the taxes on labour are 20 to 30%, sometimes even higher. The deal also potentially leaves a gap between how multinationals are taxed and how smaller domestic firms that don’t fall into the scope of the deal are treated. These smaller companies could continue to struggle to compete with the Googles and the Amazons of the world, unless more action is taken. “The numbers should come much higher and be much stricter than what we have now,” Nicolaides says. “We’ve been advocating, for example, that a good level for minimum [corporate] taxation would not be 15% but closer to 25%, or a possible incremental level could be 21%.”
Nicolaides adds that it would make sense for the second phase of the agreement to see an assessment of the data, and a renegotiation of the numbers. Economists should also monitor the impact of the framework on consumers. How companies decide to offset any tax increases, after all, could have broader ramifications. “If you increase taxes on companies then part of this increase will be passed on to the consumer,” Nicolaides says. “This very much depends on competition in the market – if it’s a competitive market, part of the increase would have to be absorbed by the company. At this stage we have no theory on what the final impact will be on consumers.” At the same time, Nicolaides adds, companies will need to recognise the need for more fairness across the tax landscape. “We have a big pandemic, countries are desperate for new revenue – and most of these big firms are winners rather than losers from the pandemic. There is scope there to increase taxation in the years to come.” ●
Chief Executive Officer /
www.the-chiefexecutive.com
M.Svetlana; YuriyAlt_Art; DEmax; Alexzel; Aquir/
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Profit shifted to low-tax jurisdiction
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