19 September 2021
International Tax Harmonisation
Negotiations on global corporation tax have been re-ignited following Joe Biden's election as US President. Accounting professionals in the UK feel that a deal is increasingly likely, with some believing that it may be reached as soon as the end of this summer. However, the benefits of greater certainty for companies and the potential for more tax income for the treasury should be considered alongside the inevitable need for company restructure and increased compliance.
The United States circulated its global taxation plans to countries involved in the OECD Base Erosion and Profit Sharing (BEPS) talks at the beginning of April. There are two pillars to the plans, Pillar One, which seeks a more equitable way of taxing digital companies proposes that the scope be extended beyond the digital economy. Pillar Two advocates that a minimum rate of corporation tax should be implemented worldwide and proposes setting it at 21%.
The UK and US tax authorities appear to be on opposing sides, with the US favouring Pillar Two and the UK favouring Pillar One, however on further investigation, the viewpoints may not be so far apart. Whilst a member of the EU, the UK strongly disagreed with tax harmonisation and has promoted a low tax agenda over the years. However, corporation tax is currently on the rise, so there may be well-hidden delight within the Treasury that these tax hikes could be covered by international harmonisation.
Countries such as Ireland, Switzerland and Luxembourg that have low tax rates would be the biggest losers from tax harmonisation and winners would be countries with higher tax rates. The UK's Patent Box Scheme, a scheme which offers 10% tax to companies that invest heavily in research and development could suffer if a global rate were implemented. It is unlikely that the Pillar One proposals would affect many UK companies in the short term, but they should prove beneficial to the UK Exchequer and allow the Digital Services Tax to be repealed, since the US has threatened to retaliate against it.
If a deal is reached on global taxation, then implementation issues will soon present themselves, the biggest of which is getting countries to buy in if tax administrations disagree on the calculations, not to mention the pain of legislating and policing whatever new system is agreed upon. There are benefits to implementing a global tax, of course, otherwise the idea would not have even been considered. It should create a system which means that tax is more equitably distributed between countries and should also put a stop to the "race to the bottom", where countries cut their tax rate to chase investment.
A major change such as this will create plenty of work for accounting and tax professionals, however, and being such a big change, the work is going to have to take place in phases. The first phase will be to assist clients in modelling the impacts of the changes and planning for different scenarios. Once the changes and implications have become clear, the next phase will be to assist in restructuring their companies and managing the compliance which comes with the new reality.
Professionals are advised to keep abreast of developments as discussions gain momentum. It may have seemed ambitious when the idea was first put forward in October 2020 and the OECD set a target of Mid 2021 for reaching a decision. However, it now seems quite likely that the countries involved will come together and a decision might be reached before the G20 Finance Ministers' meeting planned to take place in Venice, Italy on 9th and 10th July 2021.