In the last 10 years, international corporate taxation has morphed from a technical topic into one of the most publicly debated topics. The tax community adapted quickly. Tax professionals are now well versed in interpreting a G7 or G20 Communique and tax experts east of the Atlantic can competently report on the intricacies of the US political processes, going as far as commenting on the statement of a Senator from Idaho.
Even by these standards, the last four weeks have been exceptional: in short succession, the G7, 132 countries of the Inclusive Framework and then, on 10 July in Venice, all the G20 countries agreed on the most significant change in corporate income tax of the last 60 years.
Under Pillar One, a formulaic share of the consolidated profit of a multinational enterprise (MNE) will be allocated to markets, i.e., where the customers are located, irrespective of whether the MNE has a physical and taxable presence there or not. Pillar One will apply to MNEs with profitability above 10% and global turnover initially above EUR 20bn. The extractive industries and regulated financial services (FS) are excluded. It remains unclear whether the FS exclusion goes beyond traditional banking, insurance and asset management and encompasses fintechs, payment service providers and insurance brokers.
Pillar Two/GloBE establishes a jurisdictional-level minimum tax system with a minimum effective tax rate (ETR) of at least 15%. All MNEs with global turnover above EUR 750m are in scope with the exception of pension and investment funds and international shipping services.
Key design questions will need to be addressed in the next 14 weeks, before the final endorsement by the G20 on 15/16 October in Rome. Some may appear to be of a technical nature but most have a high political charge.
An example under Pillar One is the ongoing work on designing a procedure to identify which entities will surrender profit to the markets. Different procedures affect the global ETR differently, depending on whether the surrendering entities sit in a lower tax-jurisdiction versus for example headquarter jurisdictions such as the UK or the US. The same procedure also determines which countries will lose their tax base.
An example under Pillar 2 is the application of the under tax payment rule (UTPR) whereby it is still unclear how non-headquarter jurisdictions can top up in a lower-tax country and which share of the low-taxed profit will be possible to effectively top up. A strict application of the UTPR will substantially restrict the ability of non-headquarter jurisdictions to use their own tax policy to stimulate investment via the tax system.
There are structural questions which should ideally have been addressed at the onset of the process but they will now remain unanswered.
Pillar One changes the system of allocation of income in two major ways. It introduces a formula (Amount A) whose parameters can be changed at any time, depending on the willingness of the most powerful jurisdictions. Even more crucially, it shifts income allocation towards a system with an important component of destination (i.e., we tax where the customers are). Does a system based on destination appropriately reward MNEs and jurisdictions that have invested and supported R&D and innovation? What are the long-term consequences for an innovative but relatively smaller market like the UK?
Pillar Two clearly restricts the ability of governments to use tax policy to stimulate business tangible and intangible investment, e.g., after an economic downturn. Is it prudent to strip countries of tax policy tools that have proved effective across the last 60 years?
On the first day of the G20 meeting in Venice, a tax symposium took place. Interestingly, it was not dedicated to the taxation of the digital economy but to environmental taxation. After having agreed on Pillar One and Two, the Finance Ministers of the G20 are already looking at the next big issue in tax. Environmental taxation and the related incentives for greener technology are inherently dependent on the underlying technology used across the value chain of an MNE. Tax experts may be well advised to quickly add green technology skills to their political science skills.