“What are the possible implications of changes to global corporation tax? How might it impact corporate locations and supply chains, and who will be the corporate winners and losers?”
Matthew Rose, Director of Tax, Treasury and Investor Relations at De La Rue. He writes here in a personal capacity and the views expressed are his own.
The impact of the potential reform might not be that significant for UK companies. A UK parent company with a subsidiary outside the UK is already subject to Controlled Foreign Company rules whereby if the subsidiary hasn’t paid a certain level of tax – which the UK defines as three quarters of the UK tax rate and which is already around the 15% suggested by the G7 – the UK parent company may already have to effectively top up that tax in the UK.
From the UK perspective, it might not be that big a change, although whether the existing “gateways” and exemptions or even long-standing international tax treaties may survive unscathed is yet to be seen. After the next G20 meeting we expect some indications of how this may develop. There will undoubtedly be political choices for countries to make.
Under existing OECD proposals known as “Pillar Two” rules, any extra corporate or withholding taxes might only apply to companies with a worldwide turnover of €750m or above. It might be that groups under this threshold may also not be subject to the full force of the future reform. Companies need to stay alert to see if the reform applies to subsidiaries of all sizes and if it does, as per indications from the G7, how it relates to the margins that each subsidiary makes. For example, you can have subsidiaries with low revenue but large margins or with large revenues making low margins. It may be that not all the rules bite, so treasury and finance need to work closely with tax teams.
Companies should look at the entire flow or chain of their profits and taxes too. For example, some territories may have low taxes on profits but then they have high taxes when it comes to trying to extract profits out of the country. Under the new rules if introduced, some countries may choose to increase their headline tax rate because they won’t want another country to obtain any amount above their headline rate up to the 15% or whatever level is finally selected.
Companies also need to understand the existing but expanding rules around country-by-country reporting. Many companies with a turnover of €750m or above may already have to send a detailed breakdown of each of their subsidiaries’ results by country to their parent company’s tax authority – like in the UK. Under the new rules, this may become a requirement for many more companies.
Treasury teams should prepare for the likelihood that companies will pay more tax but be aware that not every country will bring in the same rules at the same time. Whilst some initial responsibility will fall to tax teams because treasury and tax are usually sister departments and have direct reporting lines to the CFO, the impact will spread to treasury, especially if there is more pressure on company cash flows and payments, or if there are different ways required to satisfy tax authorities with any bonds or guarantees. More proactive treasury teams should already be thinking about what additional cash headroom they may need in the future.
There has been a history of inward investment into Ireland since the 1950s and tax has always been an element driving that investment. However, in recent years the model has shifted to Ireland drawing investment, particularly around research and development, because of our sophisticated skills and innovation base. Tax is still an element, but much less so than what it was in the past. We offer high quality skills; we are a gateway to the European labour market, and we have developed specialisations and sectors of excellence.
If Ireland’s 12.5% tax rate is increased, the non-tax elements of our offering will become even more important. This means our physical infrastructure, particularly our digital and housing infrastructure, will be key to drawing investment as well as our skills and talent base. We have real ambition on our non-tax offering and a determination to deliver the best ecosystem we can, ensuring Ireland is a great place for firms to locate.
There is still a lot of technical work to be done to determine what the new global minimum rate would be, including recognition for research and development incentives and other potential carve outs of the model. There is a direction and consensus building around a 15% rate and 15% is not materially different from our current regime of 12.5%.
We view the change as an opportunity. We are no longer the upstart we were previously. We have the substance and scale to attract businesses and if there is a level playing field that prevents other jurisdictions from competing on an aggressive tax base it could be to our advantage. Moreover, Ireland will continue to offer a stable tax offering. Tax certainty will matter, and Ireland will bring that in spades.
There are also challenges in the changes, however. The Pillar One reform, designed to re-allocate some taxing rights to market jurisdictions will impact Ireland. The reallocation of tax bases to be more consumption based is not good for small, open economies with a large export market and a small domestic market. If the reforms do lead to re-allocating more of the tax base to other jurisdictions, that will cost our Exchequer. I think there should be a recognition of the business models of small exporting countries.
Most companies in Ireland are already factoring in some increase in effective tax rates and the reform will have an impact on how companies structure themselves. The framework needs certainty and full agreement at OECD levels and IBEC is following these developments closely. Although it’s too early to make significant long-term decisions and anticipate what the implications are for Ireland’s tax regime, the trend is clear: there is a momentum behind global tax coordination and minimum corporation tax rates.
From a treasury’s perspective, the biggest impact will be cash flow management. When a tax liability arises, companies must comply and make payment within statutory deadlines that can’t be delayed. Therefore, treasury must have cash on hand. This means compliance issues could arise where multinational companies have tax liabilities in jurisdictions where they currently don’t have a physical presence or pay taxes.
Historically, companies have based their investment decisions on a range of factors including taxation matters. With increased tax costs, this consideration has become more important. The rules will also be complex: even calculating if a company is above or below the proposed minimum rate will be complicated. The challenge lies at the tax administration level and there may be a struggle in dealing with this piece of new global legislation.
As of 1st July 2021, 130 countries have backed global tax rules that will affect the largest multinational corporations in the world, on top of a 15% global minimum corporate tax. These updates, expected to take effect by 2023, will mean sweeping changes across the global taxation landscape.
President Biden’s Green Book (the administration’s fiscal year 2022 revenue proposals released in May), included a proposal to tax the largest 120 companies at 15% of their book income. The approximately 120 companies subjected to the minimum tax are those with net income over US$2bn. It is unclear how this provision will work or how it will be implemented if the OECD agrees to a compromise to eliminate digital service taxes imposed on US multinationals. The US is against unilateral digital services taxes imposed by other countries and continues to support tariffs in response to digital taxes.
The Green Book also included provisions that are affected by switching to the OECD global minimum tax if approved. It suggests an increase to the Global Intangible Low Tax Income (GILTI) rate to 21% and proposes a new provision known as SHIELD (Stopping Harmful Inversions and Ending Low-tax Developments). Both penalise entities within a related party structure that have an income tax rate below 21%.
The US wants a global minimum tax to avoid higher taxes on US parented multinationals. Biden’s proposal includes a 28% federal US corporation tax rate. The added state income taxes and the combined effective US tax rate sums up to 30%, while the OECD suggests a global tax of 15%. This means that US companies can still cut their taxes in half if they move earnings outside the US.
We expect the proposed tax changes to encourage more mergers and acquisitions for companies to align their structures with the benefits of having earnings outside of the US. We may also see the largest 120 multinational enterprises spin off parts of their business to fall below the US$2bn net income threshold.
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