NGO proposal revises minimum tax to overcome OECD approach’s shortcomings

By Doug Connolly, MNE Tax

The proponents of a new minimum effective tax rate (METR) proposal for multinational corporations say their proposal would modify the OECD’s proposed global anti-base erosion tax (GloBE) to create a plan that better addresses profit shifting, more equitably distributes taxing rights, and does both in a more administrable fashion.

The proposal was in a March 24 article authored by a group of professors and non-governmental organization (NGO) representatives, who also argue that their plan has better odds at achieving international consensus.

The METR would build on the GloBE approach, set out by the OECD as “Pillar Two” of its blueprint for addressing the tax challenges of the digitalisation of the economy. Like the GloBE, the METR would compute multinational corporations’ effective tax rate by jurisdiction. However, the METR would differently allocate taxing rights for the undertaxed profits among jurisdictions.

The plan sets forth a formula for computing the share of multinationals’ profits that have not been effectively taxed. The formula would be applied to the multinationals’ profits reported in countries with an effective tax rate below a specified minimum effective tax rate. The authors suggest a minimum effective tax rate no lower than 25 percent. However, they predict their proposal would return more substantial revenue gains than the OECD proposal at lower rates.

The taxing rights on the computed non-effectively-taxed profits would then be allocated based on the multinationals’ real activities in each country. The authors propose a test for determining allocation that they claim would avoid the complexities of the approach contemplated by the OECD. The allocation would be based on the multinationals’ physical assets, employees, and sales revenue in each country, with weightings developed based on common business models and sectors.

The METR could be applied individually by any country where a multinational has a presence, the authors say. Moreover, the formula could be applied under national rules, so treaty changes would not be necessary. In addition, countries would still be free to set their own corporate tax rate, even one below the specified minimum effective tax rate.

The authors suggest that, while the METR could be adopted unilaterally, international cooperation on the proposal could serve as a stepping stone to broader international talks addressing taxable presence and other issues. They believe the proposal should appeal to the US, which has sought greater international cooperation on minimum taxation under the Biden Administration, as well as to developing countries that have sought more equitable allocation of taxing rights.