Global tax rewrite could cost multinationals USD 100 billion annually, OECD says

by Julie Martin, MNE Tax

Global corporate income tax due from multinational groups could increase by up to 4 percent or by about USD 100 billion annually if tax reforms currently being considered by 130+ countries are adopted, OECD officials said today during a presentation of their preliminary economic analysis of the pillar one and pillar two proposals.

Moreover, the reforms should lead to a significant reduction in profit shifting by multinational groups, the OECD officials said.

The officials said that more revenue would be gained from the pillar two tax reform than pillar one. Pillar one would yield a slight increase in tax revenue as profits are reallocated away from tax havens.

Speaking via live webcast from Paris, David Bradbury, OECD head of tax policy and statistics, said that any conclusions regarding the impact of the pending international tax reform will depend upon the rate and design of the tax, which has yet to be agreed to by “Inclusive Framework on BEPS” countries negotiating the reform.

Thus, in analyzing the revenue and investment effects of the proposals, the OECD needed to base its conclusions upon a set of assumptions. The OECD will revise its statistics as countries reach decisions on the design of the tax, Bradbury said.

Bradbury also said that the OECD has been asked to carry out further analysis of the growth and investment impact of the pillar one and two proposals. This work will be presented at the end of March.

Winners and losers

Asa Johansson, OECD Head of Structural Surveillance (ECO), said that in performing its analysis, the OECD classified countries as high, middle, and low-income economies. Applying their assumptions about pillar one’s design, the OECD determined that each category of countries would experience a small gain of tax revenue if that proposal was adopted. The revenue gain tends to be relatively greater for lower and middle-income economies, she noted.

The category of countries considered to be “investment hubs” would lose tax revenue, though, Johansson said. Investment hubs, commonly known as tax havens, are defined by the OECD as countries with inward investment above 150 percent of GDP.

Interestingly, more than half the profit reallocated under pillar one is derived from only about 100 MNE groups, Johansson said.

Country data

Data on how the individual countries would fare under the international tax rewrite was not made public. The OECD has shared this information with the respective countries along with tools allowing them to determine the effect of the different tax reform design choices, Bradbury said. He added that the OECD hopes to release results with “greater granularity” in the future.

Moreover, Bradbury clarified that while each economic category, except for investment hubs, sees overall gains from adopting the pillar one reform, that does not mean that each country within each category would gain tax revenue if pillar one was adopted.

Bradbury clarified that while each economic category, except for investment hubs, sees overall gains from adopting the pillar one reform, that does not mean that each country within each category would gain tax revenue if pillar one was adopted.

Assumptions

Data from more than 200 countries were used by the OECD in its analysis, including data from all members of the Inclusive Framework, said Johansson.

Moreover, data from 2,700 MNEs were used, including some data derived from country-by-country reports shared by countries with the OECD on a confidential basis.

For pillar one, only the effect of “Amount A” was considered by the OECD. This represents a portion of a multinational’s residual profits that would be allocated, for tax purposes, to countries where customers or users reside.

The OECD analyzed what would happen if the threshold amount of profit considered to be non-routine profit was set at 10 and 20 percent of profit before tax to turnover, Johansson said.

For both thresholds, the OECD assumed that 20 percent of nonroutine profits would be reallocated to market countries, she said. The US proposal for a pillar one safe harbor regime was ignored.

For pillar two, the OECD assumed a 12.5 percent minimum rate and used a stricter, jurisdiction-by-jurisdiction approach, rather than blending, said Stephane Sorbe, an OECD senior economist.

The OECD modeled multiple scenarios involving pillar 2, including one which accounted for the likelihood of reduced profit shifting by MNEs because of the reduced tax rate differential between countries, Sorbe noted.

The additional tax revenue from that pillar two scenario combined with the expected tax revenues from pillar one could reach 4 percent, he said.

Investment effects

The pillar one and two proposals’ effects on investment costs are expected to be small, OECD economist, Tibor Hanappi, said. He said that many firms would be unaffected by the proposals because they target firms with high levels of profitability but low effective tax rates.

Another consequence of the reforms is that they may reduce the influence of taxes on investment location. MNEs located in investment hubs would be most affected, Hanappi said.

You can review the slides associated with the OECD webcast at this link.