The OECD proposes a “Two Pillar” plan to reform the international tax system which targets e-commerce over the internet.
It would apply to larger groups with annual revenues over EUR 750 million – EUR 20 billion.
Smaller e-commerce groups also have problems – see below.
Pillar One would re-allocate some taxable profit to countries where multinational groups have customers but lack the physical presence to trigger income tax under existing rules. Pillar Two would impose a 15% global minimum corporare income tax rate, removing the incentive for individual countries to offer rates below that level.
The EU has a problem because Hungary won’t agree to the 15% minimum tax rate. The US has a problem because its 15% rate applies to groups as a whole, not subsidiaries in each country separately (some above 15% tax, some below 15%). The OECD says if that happens, other countries can tax those subsidiaries as well as the US under an Undertaxed Profit Rule.
Some practitioners think the OECD plan contravenes sovereignty rules, and lacks a strong mechanism for resolving disputes about sharing out the tax cake between countries.
Our view is that multinationals groups will face multiple taxes in many countries. The combination of income tax, VAT/ GST, sales tax in the US and digital service taxes in the UK, India and elsewhere will be a potent cocktail.
We also foresee a big political problem. Imagine a Chinese company selling products to US and other consumers over the internet. The OECD seems to propose that the Chinese tax administration would act as the Lead Tax Authority helping to decide how much US tax the Chinese company should pay the US Internal Revenue Service. No chance.
Both large and small groups are also hit by the OECD’S Multilateral Instrument (MLI), a sort of super tax treaty which tightens up other tax treaties regarding taxability in many countries.
All in all, a messy work in progress.
What is a multinational group to do?
Fortunately, solutions exist depending on the circumstances and we are monitoring developments. Please contact us for information, analysis, calculations and advice.
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