with this Tax note talk episode, Tax memo Contribution Editor Nana Ama Sarfo interviews Mark Strimber of RSM USLLP. He outlines the global minimum tax laws featured in the OECD / G-20 two-pillar project and outlines the impact on various tax systems.
This transcript has been edited for length and clarity.
Nana Ama Sulfo: Highmark. I’m happy to be part of the podcast.
Mark Stringer: Thank you for today.
Nana Ama Sulfo: The OECD is expected to reach a final agreement in October on the world minimum tax, which is part of a two-pillar international tax reform project. Unlike many international tax topics, minimum taxes have received a lot of mainstream attention. Thank you for analyzing the aspects of the proposal and its meaning today.
First, could you explain to your listeners what the OECD minimum tax bill entails?
Mark Stringer: of course. This is clearly a hot topic and there is a lot of dialogue, debate and debate about the world’s lowest taxes. As you said, this is a two-pillar initiative. The first pillar is designed for very large multinational corporations. For example, one that can exceed 20 billion euros and its profitability can exceed 10%. The first pillar was designed for very large multinational corporations.
Further debated in the market is the second pillar of introducing global minimum tax rates. This basically means that the lowest floor within the global tax rate does not go down like the lowest tax rate threshold. The number thrown there is currently 15 percent.
The second pillar is some additional tax, which basically requires all countries to enact a minimum tax rate of 15%. However, if a particular country or jurisdiction chooses not to implement that 15% tax rate, it will require the ultimate parent company or other entity within the structure or will charge additional taxes.
For example, suppose your parent company has an interest rate of 20%, but you have a subsidiary that operates in your jurisdiction or at a rate of 10%, which is 5 percentage points lower. The additional tax in that sense means that the final parent will have to pay an additional 5%, the difference between 15 and 10.
The global minimum tax amount is actually designed to give some basic and minimum threshold of the tax charged, even in the competitive arena of the market. There are many rules and nuances that must be developed based on the OECD Blueprint for World Taxes and as different countries pass certain laws regarding world tax. Certainly and hopefully we will find consistency in it. However, there are some interesting rules to materialize.
At a very high level, there are three or four rules introduced into the global minimum tax. We won’t get stuck in detail, but the rule we described is known as the income inclusion rule. This works to require that low tax entities that the parent entity may own be taken into account and replenished. Equal to 15 percent.
As a backstop, they are also proposing to introduce what they call low tax payment rules. This may impose additional taxes on such payments if the income inclusion rules do not achieve 15%. Place it within a multinational corporate group. Again, this reason is designed to prevent tax source erosion.
The third rule is subject to the tax rules there. This is a more treaty-specific rule. It covers the compulsory jurisdiction originally introduced by the Base Erosion and Profit Transfer (BEPS) initiative. The rules under the Convention cover the risk of procuring jurisdictions where payments are made within the group and are seeking to take advantage of lower nominal tax rates.
Under tax law, 7.5% to 9% of withholding tax or additional tax may be added. This is levied on types of payments such as interest and royalties.
There is a set of rules, but you still need to see how everything is legislated. But broadly speaking, that’s what the rules are designed to achieve.
Nana Ama Sulfo: So why does the world in the eyes of the OECD and others even need a global minimum tax?
Mark Stringer: That’s a great question. What we are seeing is that this is not really new. When the OECD launched the BEPS initiative in 2013 or even before, it was basically aimed at targeting companies that artificially allocated revenue and profits to low-tax jurisdictions. ..
This allowed multinationals to shift their profits to places where they might not have employees. They may not have a real entity. They may not have boots or investments in the country, but they were still able to allocate considerable profits to their jurisdiction and through the way tax laws are designed to pay very low tax rates. .. This causes a lot of anxiety in the system. Countries want to get a fair share of their income.
Throughout all BEPS action items, they basically see this tax source erosion and profit shift, eroding the tax space of a jurisdiction into a low tax jurisdiction and shifting profits to that jurisdiction. It is designed. This is a stack of it in countries where businesses use taxation, and most are unfairly paying far less tax than they should be. There is a lot of momentum behind this initiative just for that reason.
There are other reasons related to why countries are currently considering the world’s lowest taxes. One of them has to do with the unfortunate pandemic we experienced. The systems that countries are trying to recover are costly. The recovery of COVID-19 by taxation is in the minds of each country.
Countries say they recognize what they might consider to be a single country solution. The global minimum tax means that there is a more consistent set of rules when established and enacted in each jurisdiction. If everyone acts according to the same general rule of a minimum tax of 15%, it is not always necessary to guess what the tax rights and tax laws of each country are. Of course, there are also nuances that will be developed.
A single country solution is not ideal. We are looking for a multilateral agreement where all countries will chime. A single-country solution in which one country determines how profits are taxed is generally inconsistent and can cause double taxation in both that country and its parent country. About uncertainty. That’s important.
Perhaps one of the most important things about this is that the country is finally awakening and saying that tax law is outdated. The past view of taxing a company based on its physical existence—where assets are and where employees are—is no longer an economic mechanism.
The economy is now a digital economy. With the digitization of the economy, countries are rethinking the entire tax system, saying, “We need something that is more consistent, more reliable, more reliable, and profitable wherever we make money.” ..
Nana Ama Sulfo: Can you explain how the global tax debate has progressed in the last few months and even over the past year in line with these policies? Not so long ago, so the idea of a global minimum tax …