The very ambitious 2023 timeline for a 15 percent global minimum corporate rate means offshore tax havens will likely bear most of the impact as firms scrounge for loopholes.
In case you might have forgotten, the new OECD tax rules are nearly here. Much of what was agreed on 8 October is expected to be finalized in the next few weeks. The OECD even foresees a signing ceremony by the middle of next year and a full implementation framework in place by the end of 2022.
It is an exceedingly ambitious pace and one that puts the horse trading at and after the COP26 in Glasgow to shame. But maybe replenishing starved government coffers with tax money is more important than saving the planet. That would seem to be the case given the sudden alacrity that the OECD has been forcing through a decade old project that attempts to bring the digital economy to bear and replace tax rules originally developed in the 1930s.
Moving Deadline
But what are the chances this all will really happen? The first pillar of the plan intends to tax 25 percent of the earnings from of the world largest global corporations if their profitability is above 10 percent.
But that is seemingly subject to a «critical mass» of jurisdictions signing it. KPMG, for example, says in a report released after the October consensus that «it remains to be seen» whether it will really start in 2023. For one thing, the exact number of jurisdictions needed is not yet clear.
The second pillar, the one that sets a global minimum corporate tax at 15 percent, also depends on the legislative processes in each country, regardless of positive signals sent out about it by numerous world leaders, including U.S. President Joe Biden, at various junctures this year.
KPMG noted in the same report that «it remains to be seen at what stage a significant number of members will have the rules in place by.»
Open Issues
KPMG also highlighted several issues that need to be solved quickly for anything to happen.
Among them is a clear definition of the world’s largest companies in the first pillar, whether there will be a foreign minimum revenue exclusion, and double tax relief rules.
For the second pillar, basic things like how to handle losses, deferred tax, allocation mechanism and joint ventures need to be set.
Offshore Impact
It is generally accepted that many islands in the Caribbean, BVIs and other jurisdictions were bludgeoned into accepting the current OECD agreement, and they are likely to be hit hardest, particularly if they are not a regional gateway or near a locus of economic activity.
The impact is likely to be less harsh in places like Singapore, Hong Kong, and Switzerland. Although they are also traditionally considered low tax jurisdictions, they also generate significant economic activity in and of themselves from a variety of industries – and they all have thriving financial sectors.
It is also worth mentioning all three have corporate tax rates near or slightly above 15 percent.
Finding Loopholes
But will any of this change corporate behaviour and force companies to pay more in taxes?
It is doubtful. Instead, it is more likely that tax and accounting departments of the world’s largest companies will skirt around well-nourished market capitalizations while manhandling profit margins down to, say, somewhere around 9 percent from 2023 on.
