General

The meeting of finance ministers and central bank governors of the Group of Twenty (G20) nations recently concluded in Venice, Italy. The meeting reached a historic agreement on a more stable and fairer international taxation framework. Several international tax law experts said in an interview with Xinhua News Agency that this reform will reshape the current international taxation rules that have been in operation for nearly a hundred years, and may have an impact on the global layout and investment operations of multinational companies.

What is the content of global tax reform

To cope with the challenges of international taxation policies posed by the digital development of the global economy and the tax avoidance of multinational corporations’ transfer of profits, there have been constant calls for global tax reform. After years of research and negotiations, the Organization for Economic Cooperation and Development (OECD) has launched a two-pillar inclusive framework that redistributes the taxation rights of multinational corporations' profits and establishes the global effective minimum tax rate.

The OECD announced on July 1 that its two-pillar international tax reform framework coordinated and negotiated has been supported by 130 countries and jurisdictions. This shows that the economic volume involved in tax reform accounts for more than 90% of the global economy. The OECD plans to complete the remaining technical work of the tax reform framework in October this year, and implement the plan in 2023.

The OECD predicts that through the two-pillar international tax reform framework, taxation rights for profits exceeding US$100 billion each year will be transferred to market jurisdictions; if the global minimum corporate tax rate is set at no less than 15%, the world will add about 150 billion yuan each year. Dollar taxes.

How to allocate the right to tax the profits of multinational corporations

The first pillar of the global tax reform framework is to redistribute part of the taxation power of large multinational corporations' global profits to market jurisdictions. That is, multinational corporations must pay taxes at the destination of sales in addition to corporate income tax at the headquarters and subsidiaries of the company.

Daniel Bunn, vice president of global projects for the U.S. Taxation Foundation, told Xinhua News Agency that current international tax rules usually require multinational companies to pay corporate income tax where they have entity operations, assets, and employees. The reformed new rules require some large multinational companies. Pay corporate income tax in the jurisdictions where its customers are located, even if the company does not own physical operations, assets or employees in those jurisdictions.

For example, suppose an American multinational company has a branch in France, and its products and services are sold to dozens of countries such as the United States, France, and Germany. According to current international tax rules, this company will pay corporate income tax to the United States and France respectively based on its profitability in the United States and France. However, other countries such as Germany, which is the company's sales market, do not have the right to tax the company's profits.

After the pillar one rule takes effect, the company will need to allocate part of the company’s global profit taxation power to dozens of sales markets such as Germany in a certain proportion based on factors such as the relative size of the customer base. The United States and France need to give up this The right to tax part of the company’s profits. In order to avoid multiple taxation, countries need to reach an international tax treaty on the pillar one rule and obtain the approval of their legislative bodies.

How the world's lowest corporate tax rate works

Pillar 2 ensures that the tax payment of large multinational corporations in each tax jurisdiction is not lower than the minimum level by setting the world's lowest corporate tax rate, thereby curbing the "race to the bottom" that tax jurisdictions compete to reduce tax rates in order to attract investment from multinational corporations.

Kyle Pomerol, a senior researcher at the American Enterprise Institute, told Xinhua News Agency that Pillar Two will set the minimum tax level for overseas profits of multinational companies. For example, a German multinational company still pays tax at the current German corporate income tax rate for its business activities in its own country, but if the effective tax rate for the tax paid in the overseas operating jurisdiction is less than 15%, Germany will levy a supplement on the overseas profits of the multinational company Taxes are levied to a minimum tax rate of 15%.

After the implementation of the global minimum corporate tax rate rule, the motivation of multinational companies to transfer their profits to low tax areas or "tax havens" will be significantly reduced. It is worth noting that when more and more countries adopt the minimum corporate tax rate rules, this will increase the overall tax rate of global multinational companies.

How global tax reform affects cross-border investment

Pillar 1 aims to redistribute the taxation rights of part of the profits of multinational companies, which will increase the overseas compliance costs of some multinational companies, but will not increase the tax burden. Michael Deverrow, a professor of tax research at the University of Oxford in the United Kingdom, told Xinhua that he estimated that 78 of the Fortune Global 500 companies would be affected by the Pillar One rule, including 37 American and European companies.

Pillar one is largely to resolve the digital service tax dispute between the United States and Europe that has lasted for several years. In recent years, France and other European countries have actively promoted the levy of digital taxes on the operations of large technology companies such as Google, Amazon, and Apple in their home countries, which has been strongly opposed by the United States. If Pillar One is successfully implemented, European countries agree to abandon unilateral digital taxation.

Pomero told reporters that those multinational companies that have a large amount of business overseas and intellectual property-intensive companies usually set up subsidiaries and other related companies in low-tax areas to avoid tax, such as technology and pharmaceutical multinational companies, so the minimum corporate tax rate rule may be implemented after implementation. It will have an impact on such enterprises.

Gary Huffbauer, a senior researcher at the Peterson Institute for International Economics, told Xinhua that the establishment of the world’s lowest corporate tax rate deprived some countries of the policy space to use low tax rates to attract investment from multinational companies, especially for those economies that have no other means to attract foreign investment. International financial institutions such as multilateral development banks should consider helping these economies.

When attending the meeting of G20 finance ministers and central bank governors a few days ago, China’s Minister of Finance Liu Kun said that China supports reaching a consensus on the key elements of a multilateral approach to the challenge of economic digitalization and taxation, and supports reaching a more stable and balanced final consensus consisting of two pillars. Program. In the design of subsequent specific plans, all parties of the G20 must take into account the development needs of economies at different development stages, properly handle the major concerns of various countries, limit the impact on real economic activities, and strive to reach a comprehensive consensus on schedule.