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Global Corporate Taxation: A Chorus of Disharmony

On Friday, October 8th 2021, the Organisation for Economic Cooperation and Development (OECD) announced that a new international corporate taxation agreement had been reached between “136 countries and jurisdictions representing more than 90% of global GDP” (OECD, 2021). Since then, relatively little has changed, as progression on the deal has proven much more difficult than the OECD and other key advocates — such as the European Union and the Biden Administration in the US — may have hoped. This article will aim to examine some of the intricacies of the new tax agreement, including its relevance to the EU, the US and its potential impact on developing nations. It will also discuss some of the wider precedents for the policy changes proposed by the OECD agreement, using Ireland’s highly controversial corporate tax code as a primary case study.

Figure 1: The OECD deal was announced in Paris France in October 2021

One Agreement, Two Pillars

The OECD agreement is comprised of two major policy reform agendas or “Pillars”. Pillar One targets market jurisdictions or, in other words, where companies pay taxes. The basic premise is that “Large companies would pay more taxes in countries where they have customers and a bit less in countries where their headquarters, employees, and operations are” (Bunn and Bray, 2022). A number of high-profile US tech companies are thought to be the principal target of this reform, with the likes of Apple, Google, Facebook and Amazon have previously attracted heavy criticism for electing to publish profits accrued elsewhere in countries offering more favourable tax conditions (Horobin and Condon, 2022). The successful implementation of the Pillar One reforms is expected to result in the reallocation of “taxing rights on more than USD 125 billion of profit” (OECD, 2021).

Pillar two is set to establish a new “global minimum corporate tax rate set at 15%”, to be applied “to companies with revenue above EUR 750 million”. The institution of an internationally recognised price floor for corporate tax is projected to generate an additional $150 million worth of corporate tax revenues per year globally (OECD, 2021). It is widely assumed that multinational tech firms are once again the primary target of this policy reform (Horobin & Condon, 2022), with many of the world’s governing bodies in agreement that existing tax laws are no longer fit for purpose in the new digital age. The proposed arrangement is not without its controversies. Some, including the United Nations, have raised doubts over whether the provisions of the new deal will prove beneficial to developing nations (Munson, 2022). Others have expressed concerns regarding a potential disconnect between the implementation of Pillars One and Two of the agreement, and whether this could prove harmful to smaller, low-tax economies in particular (McCarthy, 2022).

Figure 2: US Big Tech firms are seen as the principal targets of the OECD tax agreement

Ireland: A Corporate Case Study

Ireland has long been under scrutiny for its controversial corporate tax arrangements and is arguably the single greatest driver of the OECD’s crusade for change. Its official corporate tax rate of 12.5 per cent stands at almost half the current global average of 23.54 (Bray, 2021), and has been done since it was first implemented in 1997 (McGee, 2021). Over the following 25 years, Ireland has routinely been accused of possessing an “unfair competitive advantage” (O’Carroll & Partington, 2021), coming under significant pressure at multiple points to amend specific elements of its corporate tax doctrine. One such example is the 2015 removal of the “Double Irish”, a tax loophole which had allowed “corporations with operations in Ireland to make royalty payments for intellectual property to a separate Irish-registered subsidiary”. This subsidiary, though officially registered in Ireland, would typically be listed as a resident in another country that possessed no corporate income tax requirements (Castle & Scott, 2014). Royalties paid in turn to this subsidiary from Ireland could thus be taxed at a rate significantly below the official 12.5 per cent.

At the behest of both the EU and the US, the Double Irish policy was officially “abolished in 2015 for new companies establishing operations in the Republic” (Taylor, 2021). The clause was allowed to remain active however until the end of 2020 for companies who had already established a base in Ireland before 2015. This stay of execution allowed qualifying parties such as US tech giant Google sufficient time to find alternative arrangements for the vast sums of revenue still held on Irish soil. In 2019, Google would go on to relocate “more than $75.4 billion (€63 billion) in profits” from Ireland, ahead of a comprehensive remodelling of its global tax structure in 2020. Irish EU relations would hit another low in 2016 when a special tax arrangement granted by the Irish government to fellow US tech giant Apple was declared by the European Commission to have “amounted to illegal state aid” (Farrell & McDonald, 2016).

Figure 3: The global tax agreement aims to target the enormous profits of modern corporations

Under the provisions of the deal, Apple was allowed “to pay a maximum tax rate of just 1%”, contributing a bare 0.005% in corporate tax in Ireland for the year 2014. As a result of these findings, the European Commission ordered that Apple repay “a record-breaking €13bn (£11bn) in back taxes to Ireland” (Farrell & McDonald, 2016). This, despite the objections of both Apple and the Irish government themselves — the purported beneficiaries of the ruling. Ironically, the High Court of the European Union itself would reverse this judgment 4 years later. A joint appeal by the Irish government and Apple proved successful, with the Court determining “ ‘the Commission did not succeed in showing to the requisite legal standard that there was an advantage’ ” (“EU court scraps”, 2020), (Amaro, 2020).

Given that the Irish government have been at loggerheads with the EU on the subject of corporate tax reform for over two decades, it is unsurprising that Ireland was not initially a strong supporter of the OECD’s drive toward global fiscal conformity. It is equally unsurprising that the EU Corporate tax harmonisation has served as an ongoing objective for the EU dating back to the 1960s, and its previous incarnation as the European Economic Community (EEC) (Radaelli, 1995). Having originally refrained from entering the OECD agreement, Ireland was eventually convinced to join, alongside fellow abstainers Estonia and Hungary. This ensured that “all OECD and G20 countries” were now represented in the agreement, a fact hailed as a significant step in accelerating the progress of the OECD’s reforms (OECD, 2021). Unfortunately from the OECD’s perspective, subsequent negotiations have proven far more challenging than originally envisaged. The OECD’s original timeline promised the signing of “a multilateral convention during 2022, with effective implementation in 2023” (OECD, 2021). As things stand, any “practical implementation” is no longer seen as likely until 2024 at the earliest, causing some to speculate as to whether the much talked about agreement will ever in fact see the light of day (Wearden & Elliott, 2022).

Figure 4: US Treasurer Janet Yellen has been at the forefront of the US' role in attempted global corporate tax reform

Progress Denied

Due to the greater levels of complexity involved in the Pillar One policy changes, a longer timeframe has been granted for the execution of these reforms. The Pillar Two objective of establishing a global minimum corporate tax rate of 15 per cent is seen as a more achievable short-term goal. This has certainly been the directive pursued by the European Union, one of the principal driving forces of the new agreement. Though progress has once again proven far less predictable than previously imagined (EY Global, 2022). In the time since the OECD’s announcement in October of last year, Estonia has already reached an understanding with the EU Economic and Financial Affairs Council that will allow the postponement of “the implementation of the global minimum tax until 2030” (Jakovleva & Mõttus, 2022). Hungary meanwhile has gone a step further and actively blocked the progression of the EU’s Pillar Two policy reform by voting against it (Smith-Meyer, Tamma & Leali, 2022).

Under the current legal framework of the European Union, “EU Member States must agree tax proposals unanimously before they can be adopted”, meaning that “all tax decisions to be taken at the European level are subject to the unanimity rule” (European Commission, N.D.). Thus, if even one nation amongst the EU’s 27 members votes against a given tax proposal, it cannot pass. Poland had already exercised the power of veto with regard to the EU’s new minimum corporate tax rate in April of this year (“Poland blocks EU”, 2022), and has expressed concerns that the “EU’s competitiveness” may be negatively impacted by the implementation of Pillar Two reforms “without ensuring that digital giants are duly taxed under Pillar One” (Harper, 2022). Many have speculated however whether the Polish government’s true motivation may have been an attempt to gain leverage in an ongoing “rule-of-law dispute with the European Commission” (Smith-Meyer, Tamma & Leali, 2022).

Figure 5: Poland's ongoing spat with the EU raises the prospect of another veto in the future

The actions of both nations have greatly angered EU officials, who accused Poland of engaging in “hostage diplomacy” (Hanke Vela, 2022) before calling on Hungary to “‘immediately end its blockage’” (European Parliament, 2022). Hungary in its defence has “cited the Ukrainian war, high inflation, and its own tax system as justifications for its veto” (Bunn & Bray, 2022), while also highlighting the same concerns as Poland regarding the apparent legal disconnect between Pillars One and Two of the OECD agreement in the EU’s current proposals (EY Global, 2022). The EU has responded by calling for the abolition of the unanimous voting system, and a transition to ”qualified majority voting” instead (European Parliament, 2022). The prospect of a “progressive and targeted transition to qualified majority voting (QMV)” in the area of “shared taxation policy” was first proposed by the European Commission in 2019 (“Commission launches debate”, 2019). The motion received limited support at the time, with a number of member states rejecting the idea outright on the basis that it may “see their concerns steamrolled in future negotiations” (Smith-Meyer, Tamma & Leali, 2022). With the EU already heavily divided on how best to handle the transition from Russian energy reliance, the discord wrought by the ongoing negotiations around corporate tax reform is an unwelcome distraction for an already troubled Union.

Figure 6: US President Joe Biden has been a major proponent of corporate tax reform both at home and abroad

US and Them

The US have responded to Hungary’s ongoing blockade by terminating a tax treaty between both nations which dates back to 1979. The treaty was designed to protect both US and Hungarian nationals from “paying taxes on the same income to both nations” (Stein, 2022). It also ensured favourable rates of taxation for other forms of income such as interests and dividends earned abroad in the US or Hungary respectively (KPMG, 2022). Despite having cited “a loss of tax revenue for the United States and little return for American investment” as the principal motivation for this action (Stein, 2022), there is little doubt that its true intention is to pressure Hungary to forego its right to veto, and in doing so allow the passage of the EU’s new minimum corporate tax rate.

Having advocated heavily in favour of the new OECD agreement, describing the deal as an opportunity to halt “a global race to the bottom in corporate taxation” (“Yellen: Global race”, 2021), the incumbent Biden Administration has struggled to make any meaningful progress on the implementation of the OECD’s terms in the time since. The forthcoming “Inflation Reduction Act” looks set to confirm a new 15 per cent minimum corporate tax rate for businesses recording an income in excess of $1 billion (Lawder, 2022). Crucially, however, this revised rate will only apply to company profits published domestically. The provisions of the OECD agreement “require multinational companies with annual revenues of more than €750mn to pay a top-up tax to an effective rate of 15 per cent in every country in which they operate” (McDougall, 2022). As the current minimum corporate tax rate for profits earned by US companies operating overseas stands at 10.5 per cent (Lawder, 2022), the US will remain a long way from complying with the OECD’s terms, even should the Inflation Reduction Act ultimately pass, as it is expected to (Cochrane, 2022). The OECD deal “still lacks the universal support of Democrats and faces concerted Republican opposition” (Horobin & Condon, 2022), amid fears that it will make US companies less competitive internationally (Rappeport & Tankersley, 2022).

Figure 7: Hungary continue to stall EU progress on the OECD's agreement

Impact on Developing Nations

Less talked about in Western circles is the prospective impact of the new global tax agreement on developing nations. “Kenya, Nigeria, Pakistan and Sri Lanka” remain notable absentees from the OECD agreement (OECD, 2021), with many “low- and middle-income countries (LMICs)” citing concerns over the equity of the terms proposed, and the favouring of richer, more developed nations (McCarthy, 2022). An impact assessment carried out by Oxfam indicates that the Pillar One reforms — which require participants to terminate any digital services taxes (DST) already in operation — may result in a gain of as low as 0.026 per cent of existing GDP, and equivalent to a DST rate of just three per cent (Oxfam, 2022). A previous impact assessment carried out in 2021 meanwhile indicates that these reforms may even result in a net revenue loss for a significant number of developing nations (Oxfam, 2021). It is not altogether surprising then that a mere 23 African nations, “less than half of all the countries and jurisdictions on the continent” have signed up to the OECD agreement at present (McCarthy, 2022).

As developing nations ”tend to have higher corporate income tax rates and rely more heavily on this source of revenue”, there are valid concerns that the new minimum corporate tax rate of 15 per cent may serve as a significant hindrance rather than a help. Instead of setting a new minimum threshold as intended, the effect may prove more akin to the creation of a “new global ceiling with countries racing downwards to converge at 15 percent to remain ‘competitive’” (McCarthy, 2022). A recent report published by the United Nations Conference on Trade and Development (UNCTAD) questions whether developing nations possess the “technical capacity to deal with the complexity of the tax changes” (UNCTAD, 2022). The report highlights further concerns about the rigidity of the fiscal policy directives implicated in the OECD agreement, and whether this may impact the ability to develop nations to promote investment in key areas. Echoing the fears voiced by many of the developing nations who have to date elected not to sign up to the OECD’s terms, the report concludes that the increased tax revenues generated by the OECD’s proposed overhaul “will accrue to (mostly developed) home countries” (UNCTAD, 2022).

Figure 8: Smaller states and Developing nations stand at a major disadvantage

A Chorus of Disharmony

The fundamental stumbling block to any attempt at global corporate tax harmonisation is that any such agreement does not stand to benefit all parties equally. The OECD’s proposal was always likely to face spirited opposition, and this has certainly proven to be the case. In particular, many smaller nations have long relied upon favourable corporate tax conditions as a principal means of attracting much-needed Foreign Direct Investment (FDI). Setting hard limits on corporate tax rates and attempting to push through a one size fits all legislative framework fails to account for the incredibly diverse economic landscape that the deal seeks to encompass. Given the level of resistance the OECD agreement already faces, without even taking into consideration the increasingly tense geo-political relations amongst many of the deal’s signatories, it is difficult to imagine the OECD’s vision being realised any time soon. The possibility remains for more localised progress, as evidenced by the US’ advancement toward a revised domestic minimum corporate tax threshold, and the advanced stage of the EU’s negotiations toward the same end. Given the misgivings of many developing nations and smaller states, however, it is hard to escape the conclusion that a globalised corporate tax agreement will ultimately breed more division, rather than the unity to which it alleges to aspire to.

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A very interesting article! Although the topic is very complex and multifaceted, you managed to make the explanation very understandable. Great job!

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James Duggan

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