Marzo 16, 2019

EU vs. US on global corporate tax reform

Is the international business community ready for another revamp of the global tax code? Based on the initial feed back at the OECD‘s two-day seminar – where multinational company tax experts and practitioners could voice their reactions to various models for the digital economy outlined by the Paris-based policy institution – the answer might not be a negative one, but it is one loaded with caveats.

And considering that multinational companies are already grappling with new tax rules in the wake of the OECD’S BEPS reforms and the U.S. corporate tax reform, the overall reluctance to embrace and adopt a new model by the end of 2020 is not surprising.

Even if the onus is more than ever on the OECD to come up with a new digital economy tax model after the European Union‘s temporary digital transaction tax flamed out last 12th of March, it has became very clear that designing a new system embracing profit reallocation from source-country to a output-country (or vice versa) is a political and technical minefield.

Of course, anyone that has followed the decade of difficult EU Common Consolidated Corporate Tax negotiations will know that few countries or even no countries are relishing to send collected corporate tax revenues to the coffers of another nation. And it does not matter what the apportionment formula is. Dividing up the pie is not welcome. Perhaps the 1970s rock group Pink Floyd summed it up best in their Dark Side of the Moon classic hit song “Money”. Although the band was clearly in the vanguard it surely did not have the economy in mind with the lyrics: “money – get back…keep your hands off of my stack”. Forty years on, however crude and simplistic the words were, it sums the attitude of national treasuries when it comes to profit reallocation.

 It is for this reason and others that many tax practitioners and company tax directors insisted last March 13-14 that flaws in the OECD’s three tax models calling for profit reallocation outweigh the benefits. In the words of one expert: “there might be modifications needed to the current taxing rights system using the Arms Length Principle but these traditional methods are based on sound legal principles“.

In addition, the expert was one of many that insisted that tax disputes between tax authorities and companies would dramatically increase with any of the new OECD tax models under consideration.

Some of the other specific problems outlined by company tax experts and practitioners include the following:

* the losses incurred by start up and small businesses are not properly taken into consideration;

* the Value Added Tax imposed on product imports has not been factored into the plans;

* the reallocation of profits to country where users are based will lead to investment decline in source countries;

* the overall political impact on countries that lose revenue due to a reallocation of profits has been overlooked.

Of course, one alternative to the political and technical complexity of finding a new tax model based on profit reallocation in the minds of many company tax experts is a global corporate minimum tax. And that is the heart of the second “pillar” of the Oecd new digital tax model reviewed March 13.

The idea of a global minimum corporate tax is especially attractive now that the U.S. Corporate tax reform adopted in 2017 includes a 10.5 percent rate on the repatriation of income from intangibles such as intellectual property licensing and other fees. It will be a key initiative pushed by France and Germany later this year in the G-7 and the G-20. Both countries will push for an EU minimum corporate tax rate.

Perhaps, the most compelling reason a minimum corporate tax rate will be the most appropriate approach for taxation for the digital economy is the fact that we are still in the very early stages of the digital revolution. When artificial intelligence and automation kicks in a major way in the coming decade there is a big risk that whatever new digital tax model is adopted by the end of 2020 – other than a global minimum tax – it will be outdated. And the OECD will have to begin work again on another corporate tax model.