Despite 130 countries and jurisdictions joining the new global tax reform initiative on 15% minimum corporate tax rate, the implementation of the proposed reforms in different countries could pose new challenges, legal experts specializing in corporate taxation told Sputnik.
As part of the global tax reform initiative to ensure that multinational corporations pay a fair share of taxes regardless of where they operate, 130 countries and jurisdictions, representing more than 90% of global GDP, pledged to support the new tax reform plan by issuing a joint statement, the Organization for Economic Co-operation and Development (OECD) said last week.
The ambitious tax reform proposal seeks to introduce a 15% minimum tax rate across all the countries that joined the initiative to make sure major multinational corporations would be subject to this tax rate, no matter where their headquarters are located.
A number of countries that are widely known as tax havens by offering foreign investors to pay low taxes, such as Bermuda, the Cayman Islands and Luxembourg, have also joined the initiative. However, Ireland, being a widely recognized tax haven and a member of the European Union, decided to hold out and declined to endorse the pledge.
REACTIONS FROM TAX HAVENS
Different responses from tax haven countries to the new tax reform initiative could present new challenges to its implementation, legal experts warned.
“Implementation of the scheme is difficult because it requires that every country participate in the sense that, if some countries opt out, their actions create opportunities for large multinational companies to flout the rules,” Beverly Moran, Professor of Law at the Vanderbilt University in Nashville, Tennessee, whose work focuses on federal income taxation, including individuals, partnerships, tax-exempt organizations and corporate, told Sputnik.
The expert explained why countries with a smaller economy were less likely to support this new initiative.
“It is very difficult for small countries to agree to minimum tax rates and still have an advantage. The low tax rate is their advantage. If their rates match other countries’ rates, there is much less incentive for large multinational companies to place a part of their business in those countries,” she said.
Ireland’s relationship with US tech giant Apple is a perfect example of how smaller economies rely on offering low tax rates to attract multinational corporations.
Apple celebrated the 40th anniversary of its European headquarters in Cork, Ireland last year. Apple apparently picked Ireland to become its European headquarters because of its low tax rates, as island nation only accounts for a fraction of its sales in Europe.
The European Commission brought charges against Apple in 2016 by ordering it to pay 13 billion euros ($15.4 billion) in unpaid taxes to the Irish state. However, the European General Court ruled in favor of Apple in July of last year. The European Commission said last September that it would appeal the decision before the European Court of Justice.
Other legal experts illustrated how Ireland’s decision could complicate the tax reform initiative’s implementation in the European Union.
“I think the main reason for countries not to sign is to try and dampen the chances of the reform proposal from becoming a law in the first place. Ireland is in a Unique position being an EU member. Any EU-wide tax reform must meet certain EU constitutional requirements, and not signing on the reform would put Ireland and EU taxpayers in a position to argue (in EU courts) against the implementation of the reform on an EU-wide basis. If this move is successful, it would seriously hurt the prospect of this global minimum tax,” Omri Marian, Professor of Law and Academic Director of the Graduate Tax Program at the UC Irvine School of Law in California, told Sputnik.
The expert raised doubts over the intentions of other tax haven countries that endorsed the initiative.
“The [tax haven] countries are obvious losers from the reform. I think they are signing it simply under the assumption that (a) it won’t actually materialize, or (b) there is nothing they can do to stop it. Either way, signing it gives them a PR benefit,” he said.
TAX SALES REGARDLESS OF LOCATION
The proposed changes under the new tax reform initiative could fundamentally change how multinational corporations are being taxed, which would make tax haven countries obsolete, Moran from the Vanderbilt University pointed out.
“What the agreement does is change the rules as to where companies and transactions are taxed. Nowadays, the rules presently in place allow large multinational companies to sell goods or services in one country but pay tax on the sales in a different country based on where the company is considered located. Under the agreement, the sales are taxed in the country where the sales are made,” she said.
Marian from the UC Irvine School of Law explained how the proposed reforms could take away the incentives for countries like Ireland to become a tax haven by offering lower tax rates.
“The way the reform is structured is basically by forcing taxation either on investors, or in the countries where activity takes place. So, if Ireland, for example, chooses not to tax foreign investors (who are subject to the reform) making money in Ireland, such investors will be taxed at their home countries at the minimum rate of 15% even on earnings made in Ireland. This take away the benefit for being a tax haven that taxes at a rate lower than 15%,” he said.
For tax haven countries where the local economy depends on its appeal to foreign investors through low tax rates, they could find ways to work out the proposed reforms to maintain their competitive advantage, the expert suggested.
“There are several ways they can strike balance. First, the reform is not all encompassing. Not all corporations are subject to the minimum tax rules. So there may still be a tax-haven market for mid and small size companies which tax havens can utilize, albeit much smaller than today. Second, tax havens are very good at identifying loopholes in legal design elsewhere, and change their laws to allow foreign investors to take advantage of such loopholes. I’m sure this will happen with this reform as well,” he said.
The expert added the tax haven countries probably have to figure out new ways to restructure their economies and reinvent themselves if the proposed reforms indeed materialize.
Both experts stressed that how the proposed reforms can be implemented through local laws in different countries would decide if the 15% minimum global tax rate goal can be achieved.