We need to design the rules on global minimum taxes for implementation, to finalize this political agreement by October, says Pascal Saint-Amans, Director of OECD’s Center for Tax Policy and Administration
Global leaders are rewriting the tax rules to check the corporate practice of shifting profits artificially to low tax countries and to give taxation rights to countries where tech giants have their markets. But there will be no reallocation of taxing rights without tax certainty, assures OECD (Organisation for Economic Co-operation and Development), which is spearheading the efforts. “We will eliminate double taxation. It will happen in a fast manner, in a timely manner, and countries will not feel like their sovereignty has been completely ignored,” says Pascal Saint-Amans, director of the Center for Tax Policy and Administration at the OECD, in an interview with Mukesh Butani, as part of panel discussion at the 25th Bombay CA Society function. Edited excerpts:
What is the current progress on New Age taxation rights as well as global minimum taxes?
I think we have an agreement, but we need to finalize it and there are a few numbers to firm up. This is the achievement of almost 13 years of work. And it goes back to the global financial crisis in 2008, which was a wake-up call for the world. There was something which didn’t go well with globalization because it favored tax havens and investment hubs, and that deprived taxing countries of their sovereign right to tax companies or the individuals the way they wanted. That’s where the G20 turned to the OECD because we had worked to address the tax haven issue with one aspect which was putting an end to bank secrecy. And then in 2012, we took the initiative by anticipation of a political request to work on the taxation of multinational companies.
That goes much beyond the so-called taxation issue. It’s more about reallocating taxing rights, having more fairness in the international tax system.
Three weeks ago, we had 130 countries agreeing on an equal footing on the new frame. We now need to design the rules to implement this new frame, to finalize this political agreement by October.
Tell us more about the ongoing consultation process with developing countries on assessing the progress with BEPS action plans.
Until the BEPS (base erosion and profit shifting) project happened, we were largely in an OECD context. With the BEPS project, we move to OECD and G20. And I do remember a G20 finance ministers’ meeting in July 2015 in Moscow, where the then finance minister of India was not in favour of this agreement and wanted the right to be allowed to make necessary changes. And then at the last minute, I had to go to different finance ministers to finalize the deal. And that started an era where the G20 countries were really on an equal footing.
And when you look at the current agreement, you can see all these different interests reflected, including those of OECD countries. The subject to tax rule as a minimum standard is very powerful and is both a reflection of an Indian push, as also small developing countries in Africa.
We did an impact assessment for everybody. It showed that OECD countries will benefit in absolute terms more than non-OECD countries but that is because of the size of the economies. So, there is nothing wrong there. It was very important to show that developing countries would benefit more than their share in the global economy. A large majority of the countries have agreed. Only seven, for the time being, have not joined the consensus.
Would you leave certain businesses out of the scope of this action?
So we have two different pillars and therefore two different scopes. On pillar one, the carve-outs are for the extractive industries, the financial service industry, regulated financial services, and that’s it. So that’s the agreement. For extractives, it is location-specific. As regards pillar two, it’s only shipping which is exempt. The fact that some rights are not reallocated doesn’t mean they are exempt. Extractives will be taxed, hopefully, in the countries of extraction.
Does the consensus among the countries also mean commitment by each one to implement the deal?
The agreement needs to come into force in 2023. This may be aspirational, but is also very ambitious. This subject to tax rule is a minimum standard and will have to be implemented through bilateral treaties or multilateral convention. You cannot expect a zero tax jurisdiction to introduce Pillar Two. That wouldn’t make sense for these jurisdictions to be in the way of those willing to implement it. So, the common approach is more about securing a critical mass of countries ready to implement these. We do have this critical mass of countries.
With Pillar Two, would it really mean dis-incentivizing corporations from moving income to low tax jurisdictions?
We are just now trying to elaborate the rules for ‘pillar two’. We need know the behavior of companies which could ultimately have an impact on the anti-avoidance rule. What is for sure is that ‘pillar two’ will coexist with CFC (controlled foreign company) rules. It’s not a replacement of CFC and other anti-avoidance legislations. So, I don’t see in the first stage any trade-off between Pillar Two and anti-avoidance.
Is it possible that unilateral levies world over may take a different shape and form? And is the OECD considering any form of recourse to prevent such measures?
The question is, is the deal compatible with countries putting in place digital levies, whether you call them equalization taxes or levies, whether you call them a digital service tax, and the answer is no, you cannot have a reallocation of taxing. A very significant part of it is coming from tech companies and taxes that target tech companies. That’s not compatible. And it’s part of the deal, which has a paragraph on the fact that unilateral measures must be put at a standstill or rolled back. To summarize, digital levy is no, but overall excise taxes of VAT, which are not targeted, are instruments of tax policy and shouldn’t be a problem. But Pillar One, as well as the two, are really transformative and and should specify the tax relationship between countries, which means that digital levies will be dismantled.
Is there anything as a part of the consensus process which is specifically addressing this aspect of multinational concern on tax certainty in the market jurisdictions?
Oh, yes, absolutely. Tax certainty is is absolutely core to the agreement. So, there will be no reallocation of taxing rights without tax certainty. As part of the agreement, there are two new avenues. One is what we used to call amount B, which would be a simplified measurement of the return on distribution activities. And we have a plan to complete Amount B by the end of 2022. And the second one is the tax certainty dimension, which provides for mandatory and binding dispute prevention and resolution mechanism. The amount A will be decided through panels with all the interested countries and the companies, and this will bring very big tax certainty to the companies. It may be a cumbersome process in the beginning, with the initial investment, but it will pay off because all the countries will agree on the amount, and the quantum. So that’s something extremely important, which should reduce disputes considerably.
Now we have agreement. We just need to turn it to write it in a manner where everybody feels comfortable. At the end of the day, you need to eliminate double taxation and there will be a panel with independent parties which will decide. We will eliminate double taxation. It will happen in a fast manner, in a timely manner, and countries will not feel like their sovereignty has been completely ignored. We’re getting there. We have an agreement and we’re very confident that this would be properly implemented.
Mukesh Butani is managing partner at BMR Legal Advocates