Will global tax reform lead to a fairer tax system?


The new global framework for tax reform, the two-pillar solution, is expected to address the tax challenges posed by large multinational corporations paying low tax rates.

To date, some 136 countries and jurisdictions representing more than 90% of global GDP have signed the agreement.

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But the details of the solution have yet to be fleshed out. After that, the necessary changes will need to be made to the tax laws of all jurisdictions that have joined this effort.

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At the recent transfer pricing summit organized by the South African Tax Institute (Sait), its CEO Keith Engel as well as Lee Corrick, technical tax expert at the African Tax Administration Forum (ATAF), Diane Hay, Director of PwC UK, and Professor Lorraine Eden of Mays Business School USA, discussed the direction of the global tax system.

High level overview

Pillar 1 deals with the transfer pricing aspect and Pillar 2 sets a minimum corporate tax rate at 15%.

Corrick started the ball rolling by asking who will be the winners and who will be the losers in the Pillar 1 solution.

Pillar 1 will only apply to companies with an overall turnover of over 20 billion euros and a profit margin of over 10%.

Extractive industries (such as mining companies) and regulated financial services were excluded from the deal. So far, no definition has been provided for “regulated financial service”.

If the agreement enters into force, implementation is scheduled for 2023.

Calculation of global excess profits to be allocated to market jurisdictions

A “market jurisdiction” is one where the multinational entity (MNE) derives at least € 1 million from this jurisdiction. For smaller jurisdictions, with a GDP of less than 40 billion euros, the amount is set at 250,000 euros.

Twenty-five percent of profits exceeding a profitability ratio of 10% will be allocated to the countries in which this multinational operates (the market jurisdictions).

The Organization for Economic Co-operation and Development (OECD) is also working on developing rules based on the arm’s length principle, which will apply to entities other than so-called digital companies, but this is still under discussion. .

Work is still underway on how to provide tax certainty, and it is suggested that all jurisdictions should apply binding, binding dispute resolution to resolve issues related to the allocation of excess profits. Work is still underway on a compulsory and elective dispute settlement system for developing countries.

One very controversial measure is that countries that adhere to this new system will have to remove all digital service taxes (DST) that have already been introduced into their legislation and imposed on so-called tech companies. Some countries believe that removing DST from all businesses is a step too far.

It should be noted that Nigeria, Kenya, Pakistan and Sri Lanka have not yet signed the agreement on this agreement.

Engel said administratively it looks like a simple system. But he wondered to what extent jurisdictions would benefit, given that there could be many jurisdictions.

Pillar 2

Corrick said the rationale for Pillar 2 is to address the remaining base erosion and profit shifting (BEPS) issues associated with low taxes.

Jurisdictions will have the ability to “back-produce” group profits which are subject to a low effective tax rate.

A minimum tax rate of 15% has been imposed. However, a double taxation treaty can override this, and there is also a concern about how the additional tax will be distributed between the residence (the resident is taxed on worldwide income) and the source countries (the resident no. is taxed only on income earned in the country of residence).

Corrick stressed that African countries are concerned about the impact on tax competition and tax incentives in Africa.

The impact of pillars 1 and 2

Hay commented that a lot will depend on the implementation of pillars 1 and 2. “I think there is a question mark as to whether this will ever see the light of day… so many issues need to be addressed and then the countries have yet to accede to it in the form of a multilateral convention.

“It sounds simple, but implementation is essential.”

Hay “saw the OECD as ambivalent about the arm’s length standard.”

It sees this as a signal to countries that they can go beyond the arm’s length principle and beyond the principle of permanent establishment.

“It can trigger new types of taxation,” she says.

“I’m nervous where this is going.”

Hay believes that if the profit reallocation method is simplified and mutual agreement procedure (MAP) can be used, it will be an improvement.

Eden agreed with everything Hay said. She also noted that “the critical thing is when the OECD secretariat came out and said there were issues with the arm’s length principle”. She always considered that this was part of the tax rules and that BEPS ‘original plan was to plug in those rules. “The loopholes were created by those who want to use them. ”

It appears that the proposed two-pillar solution does not address the many loopholes that companies use to minimize their taxes.

Hay doesn’t think it’s too big to fail and is skeptical of whether it will result in a fairer tax system, and Eden is skeptical of whether she will achieve the goals she has set for herself. Engel believed that when the political winds in various countries change over time, they will be gradually reduced.


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