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Reforming the global corporate tax system

Published on: 02 March 2020

Reforming the global corporate tax system

It’s been dubbed the “World’s Hottest Economic Debate” according to the New York Times. How should companies be taxed in the digital age where profits can be moved across borders with a few keystrokes?  As some European governments consider imposing taxes on ‘tech giants’, the threat of trade war remains.

CEPS recently hosted the key architect behind the global tax talks, the OECD’s Tax Director, Pascal Saint-Amans. He is seeking to achieve political agreement this year and thus avoid trade confrontations. Mr Saint-Amans went from Brussels to Riyadh to attend this past weekend’s Group of 20 meetings where the corporate tax debate dominated talks.

My big takeaway from Mr Saint-Amans’s talk at CEPS was how much progress the OECD has made in the past few months. The basic structure of a solution is in sight. In October, the OECD published new draft proposals, which were supported by the G20 countries. In January, the 137 participating countries “affirmed” their commitment to reach an agreement on a consensus-based solution by the end of 2020.

Mr Saint-Amans and the OECD have repeatedly cautioned against national digital taxes, warning that “uncoordinated unilateral tax measures” would “undermine the relevance and sustainability of the international tax framework, and would damage global investment and growth.”

Take a step back and almost everyone agrees that the world’s global corporate tax system, designed nearly a century ago, is outdated. All types of multinational companies routinely move around profits from country to country. European governments believe digital companies who don’t need on-the-ground staff to make sales easily shift their profits from high to low tax jurisdictions. Several European countries led by France and the United Kingdom are considering or have implemented national digital tax schemes, which would tax Google, Facebook and others on their sales and profits derived within their borders.

But it is misguided to single out digital companies. Studies by the ECIPE think tank and Copenhagen Economics argued that digital companies pay as high a percentage of profits in corporate taxes than non-digital companies. The OECD argues that it doesn’t make sense to ring-fence so-called digital business models because all companies are digitising.

Mr Saint-Amans recognises that digital is not the devil: his compromise proposal in the Pillar One of the OECD draft agreement includes all “consumer-facing” companies in the tax realignment. This would not only hit ‘‘big tech’ companies, but also French luxury companies selling luxury handbags and Swiss pharmaceutical companies.

Many unanswered questions remain. In Mr Saint-Amans’ plan, financial services are out of scope, for somewhat creative reasons. Fin-tech companies that sell software and pharma companies, among others, are unsure whether they are in or out – or whether some parts of their businesses are in or out.

The OECD is trying to put a bottom line on this competitive corporate tax competition. The second part of their solution, called Pillar 2, is to impose a minimum global corporate tax rate, probably around 12-15%. The US has already implemented a minimum tax meaning that US companies are now subject to a minimum tax on their foreign earnings. Under the OECD’s calculations, all governments will see a rise in corporate tax receipts, with a total of $100 billion in additional corporate tax paid. This is a win-win for all countries.

While momentum is building for global tax reform, giant obstacles remain. Low tax corporate havens remain wary of the global minimum tax. Another giant problem comes from the U.S. While continuing to support global tax reform, the Trump Administration recently demanded a “safe harbor”. This would allow companies to opt-out from the new tax scheme.

The coming months will see whether governments can actually deliver a global tax reform. The alternative, Mr Saint-Amans warns, would be a proliferation of national taxes which would trigger trade retaliation and further destabilise the fragile world economy.

This disastrous alternative may turn out to be the winning factor for Mr Saint-Amans to achieve global consensus on the biggest tax reform of the century. We can only wish him luck.

 

William Echikson is Head of CEPS Digital Forum.

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William Echikson William Echikson
William Echikson