IET PRESENTATION

A proposal for minimum taxation – GloBE

León LaffitteSalvatore RasoViktoria Bodenbenner Sofía Escobar

INDEX

1. EXPLANATION OF THE SUBJECT

2 · MAIN ISSUES

3 · PROPOSAL

4· CRITICISM OF THE PROPOSAL

Explanation of the subject

Why is the proposal proposed?

The subject

Our presentation is about how the most recent proposals face all strategies that taxpayers and most companies use to reduce tax or to avoid the global tax liability. We won’t deal with technical issues, but with tax policy issues instead, such as sovereignty, (re-) allocation of taxing rights, base erosion and profit shifting, tax competition… In facts, in its Public Consultation Document, the OECD discusses the introduction of an effective minimum taxes on multinational firm profits, the so-called GloBE: "Global Anti-Base Erosion" proposal.

Context

• In 2015, the OECD developed the BEPS project to minimize tax avoidance by international companies which had been adopted by G20 countries to reduce gaps in the international tax framework. it has been done mostly with the Action 1 to ensure that profits are taxed where the value is created.
• The BEPS project has targeted the problem of the digitalization of the economy, mostly about allocation of taxing rights, profit shifting and base erosion. In other words, the Action 1 Report of BEPS found out that the whole economy was being digitalized and, as a result, it would be difficult, if not impossible, to control the digital economy.
• It was very important for the OECD to act because, for instance, tax base erosion and profit shifting are responsible for a loss between 4% and 10% of global corporate tax revenue, according to the OECD.
• In fact, today, almost all firms try to avoid or reduce taxes, by using different strategies, such as base erosion and profit shifting.

Context

What does BEPS mean?

Base erosion and profit shifting refers to tax planning strategies used by international companies to exploit gaps and mismatches in the tax rules between different countries. The aim is to artificially shift profits to law or low tax locations, thereby the eroding of tax base of the higher tax jurisdiction where the economic activity takes place.

Context

Where should a company be taxed?

This question can be answered with "the company should be taxed, either in the country where they do business or either in the country of residence" For that, the OECD created:

• Pillar 1, focuses on the allocation of taxing rights among countries, and
• Pillar 2, also known as the Global Anti-Base Erosion, focuses on establishing a global minimum tax rate, regardless of where they are located.

All members have the same importance in the discussion of Pillar 1 and Pillar 2.

Context

Here's an explanation video about the Pillar One and Two of the BEPS project

Context

• OECD wants to treat all firms equally, so that profits stay in the state of source, it doesn’t go to other countries.

• But the PROBLEM is that this project will negatively impact some countries, and so they don’t want to reach an agreement about the two pillars.

• Some countries may choose to participate actively and implement the OECD recommendations, while others may decide not to participate or to apply different provisions. Actual adoption often depends on each country's tax sovereignty and its own national interests.

This project is still under discussion and negotiation between the member countries of the OECD and the G20 and has not yet been formally approved or implemented.

Objectives

Our presentation aims to help you understand a little bit more about the GloBE proposal made by the OECD, and also its context, to completely avoid tax erosion and profit shifting. We also have the goal to explain all kinds of problems and all the consequences this project can face.

Main issues

How does the proposal for minimum taxation (applied to multinationals) affect States and taxpayers?

States

TAX SOVEREIGNTY

• It refers to the concept that each sovereign state or government has the exclusive right to create and enforce its own tax laws within its territory.
• It asserts the authority of a government to impose and collect taxes on individuals, businesses, and other entities within its borders.
• This concept highlights the idea that each country has the autonomy to design its tax system, set tax rates, and determine the rules and regulations governing taxation.
• The sovereignty is exercised through the taxation or non-taxation

States

TAX COMPETITION

• It consists of competing policies between tax jurisdictions through tax incentives and concessions aimed to attract corporations and individuals (i.e., less tax rates, exemptions).

HARMFUL TAX COMPETITION

• State intentionally defeats and erodes the tax bases of another state by distorting the allocation of business and trade (for example a tax system which has a 0% tax rate and gives assurance that will not do any disclosure on your information).

As Navarro says, "the minimum taxation proposal targets tax competition at a comprehensive level (not only harmful tax competition)."

• For this reason, by establishing a limit to the tax competition (the minimum taxation), the sovereignty of States to establish their own tax rate in order to attract foreign investment would be impossible.
• Does this measure work? It depends on its implementation. Only in the case each State implements this proposal in a coordinated way, the risk of profit shifting will be eliminated.

Taxpayers

INTERNATIONAL TAX PLANNING

• Tax planning refers to the planning of a person’s financial affairs in a way that the individual can get full benefit of all permissible deductions and exemptions provided by law.
• It is legal and moral because the individual aims to reduce its tax liability (to save income tax) by using the advantages of tax law. The individual acts in bonafide and the benefits emerge in the long run.

“Arrangement of a person’s business and/or private affairs in order to minimize tax liability”. (IBFD)

“Taxpayers internationally taking advantage of legal opportunities stemming from differences among tax systems in order to reduce the global tax burden” (IBFD)

Taxpayers

TAX AVOIDANCE

• It refers to the behavior of taxpayer who intentionally uses improper mechanism aimed at reducing/eliminating tax liability (to dodge tax). It is legal but immoral because the individual acts in malafide by frustrating the intentions of the law (the spirit or purpose of the law). In this case, the individual uses the shortcomings of tax law and benefits occur in a short time.

“Improper means of eliminating, reducing or postponing tax liability […] frustrating the intentions of the law” (IBFD)

“Avoidance is a term used to describe taxpayer behaviour aimed at reducing tax liability […] [which] complies with the letter of the law but against its spirit [and purpose]”. (IBFD)

Taxpayers

AGRESSIVE TAX PLANNING

• It consists in taking advantage of the technicalities of a tax system or of a mismatch between two or more tax systems for the purpose of reducing tax liability. It can take a multitude of forms and its consequences include double deductions and double non-taxation” (Recommendation C(2012) 8806, (2), UE)
• Even in this case we can affirm that ATP is the same of TA because the taxpayer is trying to frustrate the spirit of the law.

For example: it is legal to set up a company but if I do that with the only purpose to elude the tax liability, it is immoral and not permissible.

Does global minimum tax rule target tax avoidance by ensuring that MNEs pay a minimum level of tax on the income they earn?

Multinational enterprises (MNEs) will be subject to a minimum 15% tax rate on their profits arising in each country where they operate, thus preventing situations where these MNEs take advantage of differing tax regimes between jurisdictions and effectively avoid paying tax.

PRIMARY INCOME INCLUSION RULE (“IIR”) SECONDARY UNDERTAXED PAYMENTS RULE (“UTPR”)

• If the effective tax rate for the entities in a particular jurisdiction is below the 15% minimum, the parent must pay a top-up tax to bring its rate up to 15%. This top-up applies irrespective of whether the subsidiary is located in a country that has signed the agreement or not.

• If a country where an MNE is based does not apply the primary rule another parent entity in the group further down in the ownership chain must apply the IIR under the agreed rule order.
• Where the MNE is still not subject to tax at the 15% minimum tax rate, the UTPR applies, which ensures the payment of the minimum tax through a denial of deduction or similar mechanism in all the countries where the MNE has a presence.
• The IIR and UTPR ensure that top-up tax will be collected in jurisdictions that have introduced the GloBE rules, even where the MNE operates in or through other jurisdictions that have not implemented the rule.

We can state that, minimum taxation proposal through the tools mentioned above, affects the tax avoidance of the multinationals.

Allocation of taxing rights

• The allocation of taxing rights, particularly in Pillar One, is indeed a significant aspect of the GloBE proposal.
• It aims to reallocate a portion of the taxing rights to market jurisdictions, reflecting the value created in those jurisdictions through user participation, data, and other similar factors.
• This is meant to address the challenges posed by the digital economy, where companies can have a significant economic presence in a market without having a traditional physical presence.

Allocation of taxing rights

• Pillar One will ensure a fairer distribution of profits and taxing rights among countries with respect to the largest MNEs, including digital companies.
• Also, it’ll apply to multinational enterprises without total profitability above 10% and global turnover, or worldwide revenue of initially above 20B€ trying to ensure multinational enterprises pay a fair share of tax wherever they operate.

An example of allocation taxing rights

We have a MNE, which operates in various countries, providing online services, such as digital advertising. The MNE generates significant revenue from users in Country A, but, this MNE has its presence primarily in Country B, where it has its headquarters and significant research and development activities. Under traditional tax rules, the MNE might only be subject to taxation in Country B, where it has a physical presence. However, under the GloBE proposal, there is an attempt to allocate taxing rights to the market jurisdiction, reflecting the economic value created there.

Proposal

How does it work? What is this proposal about? What are the main features?

The GloBE proposal

The Global Anti-Base Erosion (GloBE) proposal is part of the ongoing efforts by the Organisation for Economic Co-operation and Development (OECD) to address tax challenges arising from the digitalization of the economy. The GloBE proposal is one of the key elements of Pillar Two of the OECD/G20 Inclusive Framework on BEPS (Base Erosion and Profit Shifting).

Timeline

Inclusive Framework Agreement: on the key components of the two-pillar, which included an outline of the GloBE proposal, emphasizing a global minimum tax.

Pillar Two Development: address remaining BEPS challenges, those related to the digitalization of the economy and ensuring a minimum level of taxation

2020

2018-2019

2023

2019

2013

Release of Public Consultation Documents: they sought input from stakeholders, including governments, businesses, and the public

BEPS Project Launch: by the OECD to address concerns related to tax avoidance strategies used by MNEs

138 members of the OECD/G20 Inclusive Framework on BEPS agreed on an Outcome Statement recognizing the significant progress made and allowing countries and jurisdictions to move forward with historic, major reform of the international tax system.

Challenges of the GloBE proposal:

1. Complexity and Implementation:

The implementation of rules and mechanisms introduced by the proposal, to ensure a minimum level of taxation across diverse jurisdictions with varying tax systems and legal frameworks, could lead to difficulties in interpretation and application.RESULTS: administrative burdens for tax authorities, increased compliance costs for multinational enterprises, and significant adjustments to domestic tax laws and treaties

Challenges of the GloBE proposal:

2. Risk of Double Taxation:

Coordinating and ensuring consistency in the application of the GloBE rules to avoid both under-taxation and double taxation is a significant challenge. Businesses may face challenges in navigating conflicting tax claims from different jurisdictionsRESULTS: disputes, hinder cross-border investments, and create a less predictable international tax environment.

Challenges of the GloBE proposal:

3. Consensus and Global Implementation:

Due to the diverse economic interests each country has, securing agreement on a common framework for a global minimum tax rate requires extensive negotiations, which may release concerns about the impact on their tax sovereignty, economic competitiveness, and investment climateRESULTS: fragmentation in the international tax landscape, implementing their own unilateral measures, uncertainties for businesses and potentially undermining the effectiveness of the GloBE proposal in achieving its objectives.

Finding a balance between preventing base erosion and profit shifting while ensuring a fair and administratively feasible global tax framework is crucial for the success of the initiative.

Main features of the proposal

2. Income Inclusion Rule: This feature requires jurisdictions to include in their tax base income that has not been subject to the minimum tax. If a multinational enterprise's income in a particular jurisdiction falls below the agreed-upon minimum tax rate, the jurisdiction has the right to include the déficit in its tax base, subject to certain adjustments. This ensures that income escaping the minimum tax is effectively taxed.

1.Global Minimum Tax Rate: Under this feature, jurisdictions agree to implement a minimum tax rate to ensure that multinational enterprises pay a baseline level of tax, regardless of the jurisdiction in which they operate. The minimum tax rate is intended to prevent the shifting of profits to low-tax jurisdictions and establish a floor for corporate taxation.

3. Undertaxed Payment Rule: This one allows jurisdictions to deny deductions or impose withholding taxes on certain payments made by entities subject to low levels of taxation. This prevents situations where MNEs make deductible payments in low-tax jurisdictions, reducing their overall tax liability. It helps counteract such tax planning strategies.

Main questions

1. Where should a company mainly be taxed? 2. Who should be the subject of taxation? 3. What should be the tax rate? 4. Why is this needed?

Conclusion and legal position of the proposal

Group opinion: pros and cons.

Consequences

• Is the proposal binding?
• Works like a “preamble”
• Every country must adapt these guidelines to their legislative processes

• REMINDER: consequences (= main concepts) of the proposal

- Limiting Tax Avoidance - Increased Tax Revenues - Complexity and Implementation Challenges

Advantages

Closing Loopholes:- Minimum taxation could help close tax loopholes and increase tax revenues

Fairer Taxation: - Distribution of tax burden -Among multinational companies and smaller enterprises - Among countries

Disadvantages

1. Competitiveness:

• Minimum taxation could reduce the attractiveness of some countries
• Keyword: international competition
• Potential negative impacts on their economy

Disadvantages

2. Complexity and Bureaucracy:

• The implementation could require complex regulations
• Additional bureaucracy

Disadvantages

3. Adjustment Requirements for Companies

• Adjustment of companies tax strategies
• Additional costs and administrative burden

Thank You For Your Attention!

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