Understanding the G20/OECD Proposals for a Global Minimum Rate of Corporation Tax

John Weybourne analyses the technical side of the OECD’s new tax framework

Introduction

As of 9 July 2021, 132 countries and jurisdictions, representing more than 90 per cent of global GDP, have signed up to the Organisation for Economic Co-operation and Development’s (OECD) Inclusive Framework for international tax reform and a global minimum rate of corporation tax.

On 12 October 2020, the OECD published its Blueprint for the Inclusive Framework on Base Erosion and Profit Shifting (the Inclusive Framework). The Inclusive Framework proposals are targeted at reducing the use of low tax rate jurisdictions by large Multinational Enterprises (MNEs) in order to lower their global tax liabilities. A key part of the OECD’s proposals for achieving this objective is the introduction of a global minimum rate of corporation tax.

Although the proposals for a global minimum rate of corporation tax were originally introduced as part of the OECD’s Blueprint on the Inclusive Framework, the proposals gained significant media coverage during the meeting of the Group of Seven (G7) Finance Ministers in London in June 2021.

Why are the G20/OECD proposing a global minimum corporation tax rate?

The OECD estimates corporate tax avoidance costs countries anywhere from USD 100 to 240 billion annually, which is equivalent to 4 –10 per cent of global corporate income tax revenues.

Over the last eight years, the OECD’s Base Erosion and Profits Shifting (BEPS) Actions has led to targeted tax anti-avoidance legislation aimed at reducing the ‘offshoring’ of profits to low-tax jurisdictions by large MNEs.

Although the targeted tax anti-avoidance legislation introduced as part of the BEPS Actions has successfully increased tax revenues, there has been concern that developing economies are being disproportionately impacted due to their reliance on revenues from corporate income taxes.

The OECD have endeavoured to design The Inclusive Framework to ensure large MNEs pay taxes in the countries where they earn profits. However, there are concerns the ’Additional Taxing Rules’ designed to enforce the global minimum tax rate may simply increase the tax revenues of the G7 with no additional benefit for developing countries. This will be one of the key issues for the OECD to address when their Blueprint on the Inclusive Framework is developed into model legislation and multi-lateral instruments before the proposed implementation deadline of 2023.

How will the Global Minimum Corporation Tax Rate Proposals Operate?

In order to achieve the objective of a global minimum corporation tax rate, the OECD is proposing to introduce three new ’Additional Taxing Rules’ designed to reduce the use of low tax jurisdictions by large MNEs as a mechanism for reducing their global tax liabilities.

The global minimum corporation tax rate proposals have been designed to apply to large MNEs. The definition of a large MNE is the same as used within OECD Transfer Pricing Guidelines for the purposes of Country-by-Country Reporting, and applies to groups with consolidated revenues over €750m.

1. The Income Inclusion Rule (IIR):
Central to the OECD’s objective of enforcing a global minimum corporation tax rate is allowing countries Additional Taxing Rights where other jurisdictions have not exercised their primary taxing rights, or the income is subject to low rates of tax.

The IIR is designed to provide the tax authorities in the country where the MNE is headquartered the ability to levy additional corporation tax charges where profits of subsidiaries have not been charged to corporation tax at a rate equal to the global minimum corporation tax rate, currently anticipated to be 15 per cent.

The IIR is expected to be the most frequently applied of the three Additional Taxing Rules to enforce the global minimum corporation tax rate. It remains to be seen whether this will meet the OECD’s objective of increasing tax revenues in developing countries on the basis the IIR will be exercised in the country where the MNE is headquartered.

2. The Undertaxed Payments Rule (UTPR):
The UTPR is designed to allow tax authorities the right to disallow tax deductions for certain payments where the recipient of the payment is based in a jurisdiction which will tax the payment a rate below the global de minimis tax rate.

The UTPR is expected to apply significantly less than the IIR, and will apply where payments are made from a high tax rate jurisdiction to a low tax rate jurisdiction.

3. The Subject to Tax Rule (STR):
The STR is designed to turn off treaty benefits on intragroup payments of royalties, interest and certain defined other payments that are not subject to a minimum nominal rate of tax in the payee jurisdiction.

Out of the three Additional Taxing Rules, the STR was covered in the least detail in the OECD’s Blueprint on the Inclusive Framework. However, it is also likely to be the most complicated of the three rules to operationalise on a multi-jurisdictional basis.

Significant clarification on the operation of the STR is expected to be provided when the OECD publishes further guidance materials in October 2021.

Key milestones in the development of the global minimum corporation tax rate

Jul 2013                   OECD identifies tax anti-avoidance as a priority

Oct 2015                  Adoption of BEPS package of 15 actions to counter tax avoidance

Jun 2016                  Establishment of the OECD/G20 Inclusive Framework on BEPS

2017-2020               OECD/G20 led discussion on the Inclusive Framework and how to address the digitalisation of the global economy

Oct 2020                  The OECD publishes the Blueprint on the Inclusive Framework and proposals for a global minimum corporation tax rate

Jun 2021                  G7 outlines the intention for a global minimum corporation tax rate of 15 per cent

Jul 2021                   132 countries and jurisdictions have signed-up to the Inclusive Framework

Oct 2021                  OECD to provide further reporting to the G20 Finance Ministers and technical guidance on the Inclusive Framework

2022                          Development of model legislation, a multilateral instrument and detailed technical guidance

2023                          Implementation of the Inclusive Framework
 

Next Steps

The OECD has committed to publishing detailed technical guidance as to how the proposals for a global minimum corporation tax rate are to be incorporated into legislation in October 2021.

One of the more contentious issues to date has been the rate at which the global minimum tax rate should be set. Although agreement has broadly been reached at a 15 per cent de minimis rate, it is anticipated there may be further developments as the proposals are discussed by the G20 in October 2021. This could see potential increases or decreases to the de minimis rate. The USA has previously advocated a rate of 21 per cent to mirror the rate used in its Global Intangible Low-Taxed Income (GILTI) regime.

Although there has been media speculation low tax rate jurisdictions may be required to increase the headline rates of corporation they levy, any such changes are only expected to be enacted to apply to companies forming part of large MNEs. There are also expected to be exemptions introduced for Collective Investment Vehicles established in low tax rate jurisdictions.

For large MNEs with subsidiary operations in low tax rate jurisdictions, the OECD guidance will be a key deliverable in assessing the impact of the minimum corporation tax rate proposals on global tax liabilities, and any potential tax restructuring required to mitigate the impact of any tax law changes.

John Weybourne LLB (Hons) CTA is global head of tax at Apex Group Ltd, a global financial services provider with 50 offices worldwide: theapexgroup.com