Legal Flash – Redesigning the international tax system: an update
Significant changes to the international tax system are currently being negotiated. Tax partners at leading firms from eight key European jurisdictions, including Arthur Cox, have prepared a summary of these proposed changes and an overview of developments in certain selected countries.
Globalisation and digitalisation have fundamentally changed the ways in which cross-border business is conducted and (as some have argued) have undermined the efficacy of international tax rules which were designed nearly a century ago.
Over the last decade, and particularly since the original OECD BEPS Action Plan published in 2013, countries have been working to design a tax system that is better able to recognise and adapt to the realities of conducting business in the twenty-first century. Amendments have been implemented at multiple levels and designed to tackle different objectives. Notwithstanding the myriad developments, some countries believe that the implemented measures have not done enough to counter the original problem of how to tax businesses operating internationally in the twenty-first century, and that further change remains necessary.
Negotiations on the taxation of multinational enterprises (MNEs) to ensure they pay more corporate tax continue at a sustained pace in the countries where they are established (headquarter jurisdictions) and in the countries where they operate (market jurisdictions), including the recent G7 meeting, and the OECD’s work on the Pillar One and Pillar Two proposals. The G7 proposals have attracted criticism and will be discussed among other groups of countries. Some of the criticism and debate about these proposals includes the following:
- they are over complex and uncertain and their application should be considered in more depth across each country prior to acceptance;
- they lack a sufficiently robust dispute resolution mechanism which, linked to the complexity and uncertainly, means that companies (and their investors) we be are concerned that they will may be subject to arbitrary taxation;
- they favour large developed economies with large markets over small and developing countries – this which is perhaps unsurprising bearing in mind the membership of the G7. A significant issue is that countries will be very limited in their ability to fine tune their corporate tax systems to support their economic development goals. This will impact mostly on developing and geographically peripheral countries, the economies of which are different from those of the large and rich G7 countries that are, in most cases, also physically connected with other large markets;
- they fail to utilise a simple mechanism: increasing existing consumption taxes: a simple increase in VAT would allocate taxation to large market countries. It has been commented that voters may object to a VAT increase, but may not notice a tax on corporations even if it leads to higher prices; and
- they seem counter-productive from an environmental perspective as they will largely affect companies that are technology focused whereas heavy, polluting industries may be mostly unaffected.
In light of the scale of these developments, it is worth considering their impact on cross-border and domestic situations – in particular, the potential effects of that these G7 and OECD proposals (either in their current form or as they may be amended) not only on the mechanics of taxing MNEs, but on the configuration of tax systems across the world.
Tax partners at leading firms from eight key European jurisdictions, including Arthur Cox, have prepared a document that aims at summarising the proposed changes and to provide an overview of developments in certain selected countries.
Read the full joint publication here.