Introduction

We refer to the OECD’s Secretariat Global Anti-Base Erosion (“GloBE”) Proposal under Pillar Two which opened for consultation on 8 November 2019.

As explained in the consultation document there are four component parts to the GloBE proposal which envisages an income inclusion rule, an undertaxed payments rule, a switch-over rule as well as a subject to tax rule. These proposals, like Pillar One, pose a substantial change to the international tax architecture by subjecting internationally operating businesses to a minimum rate of tax.

On review of the proposals put forward in the Secretariat GloBE proposal under Pillar Two, the observations of the CCAB-I can be summarised as follows:

• We have concerns that the proposals will be a barrier to growth for businesses and economies.
• The impact of the 2015 BEPS initiatives should be allowed more time to ingrain into the Inclusive Framework jurisdictions before the international tax rules are re-written again.
• A global minimum tax rate would impede on a country’s sovereign right to set its own tax rates.

Our views on the Pillar Two proposals are set out below.

1. International tax rules should not hinder growth or place an undue burden on business based in smaller economies

By deviating from long standing principles, the proposal for a global minimum tax would have the effect of creating barriers to investment. The proposals would disrupt genuine investments that lead to real economic activity and the implementation would have real economic effects that need to be carefully evaluated. While the overall impact of these proposals will depend on the level of the minimum tax rate, we are concerned that the proposals target real economic activity.

As work on this project continues, it is important that assessments of the economic implications of these proposals continue and that the outcomes of the economic assessments be fully reflected in the discussions and decision-making process. It must be recognised that the effects of the proposals could go well beyond targeting any potential for artificial profit shifting or use of structures without substance. Any potential solution must strike the appropriate balance and not disproportionately prejudice small open economies who seek to attract and rely on substantive foreign direct investment in order to grow their businesses and economies.

The consultation document discusses establishing a floor for tax competition among jurisdictions. We have concerns with the introduction of a floor for tax rate competition. Competition is central to the operation of markets. It fosters innovation, productivity and growth, all of which create wealth and reduce poverty. Competition is the process of rivalry between firms striving to gain sales and make profits, is the driving force behind markets and efficient and fair markets are essential for catalysing private sector development and economic growth. Competition can be harmed by inappropriate government policies and legislation. We do not agree with the introduction of a floor to international tax competition. In our view international tax competition is inevitable, and free and fair tax competition is necessary in order to allocate resources efficiently and to maximize global welfare.

It is of critical importance that tax rules do not discourage businesses to trade, grow and deliver services to customers and markets as a result of increased compliance costs, tax disputes and complexity all of which ultimately slow the growth of digitalisation globally.

2. Before the international tax rules are re-written again, the impact of the 2015 BEPS initiatives should be allowed more time to ingrain into Inclusive Framework jurisdictions

The consultation document explains how the GloBE proposal is intended to address the remaining BEPS challenges linked to the digitalisation of the economy. However, it goes even further than the digitalised economy and addresses these challenges more broadly. These proposals are not merely an extension of the BEPS project but another over-haul of the international tax system. The OECD should be clear about how fundamental and far-reaching the proposals being considered really are.

The consultation document describes the global anti-base erosion proposals as aimed at addressing “the harmful race to the bottom of corporate taxes.” This was the concern at which the BEPS project was aimed. Countries around the world in the Inclusive Framework are in the process of implementing the BEPS recommendations and the results of the BEPS work should be allowed to play out before undertaking an evaluation of whether and where there may be continuing areas of concern. Any new proposals to address base erosion or tax avoidance through profit shifting should be coordinated with the BEPS recommendations in order to ensure that the combined rules are appropriately integrated.

In addition, EU Member States are in the process of implementing the Anti-Tax Avoidance Directive (ATAD) and ATAD2. Until the overall BEPS package and ATAD measures have been fully implemented by countries, the full effect of these far-reaching changes to the international tax system will not be known and whether they have achieved the desired behavioural impact.

Given the extent of the measures which are still being implemented by countries of the Inclusive Framework and the EU and the ongoing work on preferential tax regimes and the EU Blacklist, a longer-term perspective should be adopted. Controlled Foreign company (CFC) rules have only recently been implemented by EU Members States and are designed to achieve many of the same objectives as the income inclusion rule now being proposed. The measures being proposed appear to have already been tackled.

In addition, the complexity in designing a minimum tax rate in a global context cannot be underestimated. Any disparity in the implementation of such measures will inevitably lead to double taxation, for example, where countries fail to take account of tax already paid at different levels (e.g. tax paid under CFC rules or under the GILTI regime in the US).

3. Countries have the sovereign right to set their own tax rate

We are concerned that the GloBE proposals outlined in the consultation document would erode the sovereign right of countries to choose the corporate tax rate that is best for their particular economic circumstances and their particular tax system. Under long-standing principles, there should be no question that the country where the commercial activities are performed is fully sovereign in deciding whether and how to tax these activities. Also, measures which seek to disallow payments simply because of the tax rate of the recipient seem to be in breach of EU principles where the recipient is resident in an EU Member State. EU Member States have the sovereign right to set their own tax rate.

4. Conclusion

Established international tax rules cannot be disregarded which risks creating chaos for international businesses and tax authorities alike. It must be recognised that established international tax rules have generated a stable global corporate tax yield over the last 16 years for developed and developing economies alike, as evidenced by OECD data26.

Existing international tax rules are backed up by substance and sound economic logic which should be respected. It is important for policymakers to think long and hard about how a radical rethinking of international tax principles will impact the stability of the global corporate tax yield and the impact on individual countries. Policymakers must also consider how international business will cope with another layer of complex and burdensome international tax rules.

It is of critical importance that tax rules do not discourage businesses to trade, grow and deliver services to customers and markets as a result of increased compliance costs, tax disputes and complexity all of which ultimately slow the growth of digitalisation globally.

Source: Chartered Accountants Ireland.

26 OECD, Corporate Tax Statistics, First Edition. The report shows that corporate tax remains a significant source of tax revenues for governments across the globe. In 2016, corporate tax revenues accounted for 13.3 percent of total tax revenues on average across the 88 jurisdictions for which data is available. This figure increased from 12 percent in 2000.