The new rules, yet to be truly formulated, are meant to ensure that the world’s largest multinational technology companies will pay “their fair share” of tax in the countries in which they operate.
Historic tax regimes globally that dealt with traditional bricks and mortar business are not designed to deal with the digital age where multinational companies (MNCs) can sell services remotely and attribute profits to intellectual property and other assets located in low tax jurisdictions.
Broadly under the so called “two pillar” approach, the G7 have agreed the following:
- Under Pillar One, the largest and most profitable MNCs will be required to pay tax in the countries in which they operate and just not where they have their headquarters or base of operations. The rules would apply to MNCs that have at least a 10% profit margin, with 20% of any profit above the 10% margin reallocated and subject to tax in the countries in which they operate. This is a far more sophisticated proposal than some of the unilaterally implemented digital or turnover taxes that some countries have legislated, which are expected to be wound back once these measures are brought into play.
- Under Pillar Two, the G7 have agreed to a globally recognised minimum corporate tax rate of at least 15% thereby avoiding so called tax havens and to level the playing field on corporate tax rates globally.
Next stop will be gaining approval at G20, which may prove challenging, as some of the other smaller countries may not be as supportive of potentially limiting the attractiveness of their current tax regimes. This is certainly the case in some low tax jurisdictions which use their tax system to attract business investment, and are by no means your traditional tax haven. So the question of a minimum tax rate much higher than 15%, as was being promoted by the Biden administration, is still to be determined
Whether this is a positive for Australia is still uncertain, especially as our exceptionally high company tax rate of 30%, makes it one of the highest in the world. While this proposal may ultimately result in a greater proportion of tax revenue collected in Australia, our current tax rate does not remove the competitive advantage held by lower taxing jurisdictions.
Global tax reform under OECD proposals has been the subject of discussion for a number of years, particularly with respect to the large US digital MNCs, and there is still a long way to go before the above measures are properly designed, let alone agreed upon and implemented. The political football game of ensuring global tech giants pay their fair share of tax in the countries in which they operate will continue for some time to come. Perhaps it’s not even half time.