During the last few years, we have seen an unprecedented number of changes, new legislative frameworks, and global agreements when it comes to international taxation. The wave of these changes started, more or less, with the introduction of FATCA which paved the way for more transparency and exchange of information agreements through the Common Reporting Standards (‘CRS’). In parallel, the OECD concluded their BEPS Action plans which led to a new multi-lateral instrument, which was unheard of in the field of direct taxation, prior to this date. As a response to the OECD, the European Commission issued its own anti-tax avoidance directive, ‘ATAD’, which brought about considerable changes within the European Union. The discussion then revolved around taxation of the digital economy, and the desperate need of updating international tax principles to keep up with the way business is currently conducted. A number of proposals have been issued, with the 2 pillars at OECD level. The European Commission issued its own proposals in relation to a digital Permanent Establishment and a digital services tax, and in the meantime, a number of countries introduced these concepts on a unilateral basis.
The discussion around taxation of the digital economy has now been extended to every industry, and is not just focussed on the digital economy, through what started as the G7 agreement on a minimum global tax rate of 15%. This agreement, which now also includes the G20 countries, amongst others, involves 2 proposals: Firstly, it covers a re-allocation of taxing rights to market countries on at least 20% of profit exceeding a 10% profit margin. The proposal is that multinationals with a global turnover above €20 billion will be considered in scope, with this value falling to €10bn after several years, when a review is expected to be conducted. Secondly, the proposal also includes a minimum global tax rate of 15%, which would be applicable to multinationals with a global turnover exceeding €750m. There is still a long way to go for these agreements to transpose themselves into a legislative framework, as there is still quite a strong opposition both from the US Republican Party and also from a number of EU countries, namely Ireland, Estonia and Hungary. It is also important to understand what position China will take on this.
Whilst the last few years did in fact bring about changes within the international tax landscape which we had never seen before, they will probably be immaterial compared to the changes which the world will go through, from a tax policy perspective, within the next 3 to 5 years. The global minimum tax agreement, whilst still having several loose ends, would be something which we have never seen before – both in terms of the scale of the impact, particularly on multi-nationals, but also when one looks at the speed with which such an agreement was reached.
The writer is a co-founding Seed Consultancy, a research-driven advisory firm based out of Europe.
www.seedconsultancy.com | nicky@seedconsultancy.com