OECD consults on “GloBE” global minimum corporate tax rate

By Patrick McCalman and Hamish Tait

The OECD Secretariat has recently released for consultation further details of a draft proposal entitled Global Anti-Base Erosion, or GloBE, which would in effect establish a global minimum corporate income tax rate for certain multinational businesses (refer to the heading “carve-outs and thresholds” below). The proposal, initial details of which are outlined in the November 2019 GloBE - Pillar Two consultation document, comprises four key rules intended to require multinational corporate groups to ‘top up’ their tax in one jurisdiction where there is insufficient tax paid in other jurisdictions. A public consultation meeting will be held in Paris on 9 December 2019.

This proposal represents Pillar Two of the OECD’s two-pronged approach to “addressing the tax challenges of the digitalisation of the global economy”. Pillar One relates to the reallocation of taxing rights between countries, as discussed in this article in our November 2019 Tax Alert.

Why was GloBE proposed and how would it work?

The GloBE proposal comprises a series of complex rules designed to strengthen the ability to tax the profits of multinationals where income is subject to a low effective tax rate. This would be achieved by requiring “top up” tax to be paid where the effective tax rate on income is below a global minimum rate (the rate is yet-to-be-agreed, but there have been suggestions that it may be between 10-15 percent). The intention of the proposal is to reduce the incentive for multinationals to undertake “profit shifting”, or for governments to engage in “tax competition”. The OECD considers that these rules are necessary to prevent a harmful “race to the bottom” on corporate taxes, which could be damaging, including for small developing countries.

As the proposal currently stands, GloBE’s four key mechanisms would collectively seek to:

• Impose tax on foreign income that is taxed at below the minimum rate, either through an “income inclusion rule”, or by a “switch-over rule” that would switch off the benefit of tax exemptions in respect of that income; and
• Impose tax on “base-eroding payments” subject to low tax overseas, by denying deductions in respect of those payments, by imposing source-based taxation (e.g. withholding tax), or by denying tax treaty relief.

What is being consulted on?

The consultation document does not represent a ‘consensus view’ of the G20/OECD Inclusive Framework (the group that has tasked itself with developing the GloBE and Pillar One proposals). Rather, it has been put together by the OECD Secretariat primarily for the purpose of seeking public comments on three technical design aspects, summarised below.

Determining the global tax base

The consultation document discusses how the global tax base (i.e. the global ‘net income’ amount to which the global minimum tax rate would apply) should be calculated, and how the balance should be struck between accuracy and minimising compliance costs for businesses. The document suggests the use of financial statements as a starting point, and discusses which financial statements (e.g. subsidiary accounts versus group consolidated accounts), and which accounting standards, might be acceptable.

The document also discusses whether global ‘tax adjustments’ might be required to allow for the differences between taxable income and accounting profits – essentially, establishing a new global method of calculating taxable income specifically for the GloBE proposal. This canvases both permanent and temporary differences. To address the effect of temporary or ‘timing’ differences, the document suggests some combination of:

• allowing the ‘carry forward’ of excess tax paid over the global minimum rate;
• basing the global tax adjustments on the deferred tax treatment in the accounts; or
• allowing multi-year averaging of profits and tax paid.

Such calculations have the potential to materially affect the complexity and resulting compliance costs of these proposals.

Blending: The extent to which income should be combined when calculating the effective tax rate/rates

As GloBE is an effective tax rate (ETR) test, it is necessary to consider how the rate should be calculated. The document discusses whether the ETR should be calculated on a global basis by ‘blending’ all foreign income together, whether the ‘blending’ should be limited by jurisdiction (i.e. separate ETRs for each country), or some other combination (e.g. an entity blending approach).

Each approach has different policy implications and implementation challenges, and the document notes that whether low or high tax income spread across entities and jurisdictions is able to be blended could materially impact on the fairness and effectiveness of the proposal. Again implicit in a drive for more accuracy, is more complexity with a resulting increase in compliance costs.

Carve-outs and thresholds

A number of possible carve-outs and thresholds are mentioned in the document, although very few details on the Secretariat’s views in that regard are provided. The possibilities listed include:

• the exclusion of smaller corporate groups from the regime;
• carve-outs for regimes compliant with BEPS Action 5 on harmful tax practices or similar;
• carve-outs for groups with low levels of related party transactions; and
• whether specific industries or sectors should be excluded.

Possible implications for NZ business

The proposal is still at a very preliminary stage, and there is currently little consensus within the Inclusive Framework on the direction the proposal will take. However, if or when   consensus is reached, history would suggest that New Zealand would take steps to adopt the proposal within our tax law.

Despite this, the impact this proposal would have on New Zealand businesses will be substantially affected by the extent to which carve-outs and thresholds are adopted. For example, if GloBE is restricted in application to businesses with a global turnover of €750 million (as has been the case with a number of other OECD proposals), very few New Zealand-owned businesses would be subject to the regime. (It could also be argued that this threshold is too low and a higher threshold is more appropriate.) Similarly, if there were carve-outs for certain sectors or industries, this could further reduce the impact (however the consultation document does not indicate what those sectors are likely to be).

Conversely, for significant foreign-owned businesses operating in New Zealand, it seems more likely that the regime would apply. Accordingly, there are likely to be additional compliance costs incurred in New Zealand for businesses, in terms of collecting and calculating the relevant information required to determine the tax base and ETR, as outlined above. Most businesses may not, however, be required to pay substantial ‘top up’ tax in respect of their New Zealand operations, given New Zealand’s relatively broad tax base and relatively high corporate tax rate. A possible exception to this is businesses that generate significant untaxed income (for example, capital gains) which would drop the ETR, particularly if the ETR was required to be calculated a jurisdiction by jurisdiction basis.

General comments

GloBE is notable in that it appears to go much further than the OECD’s existing BEPS mandate – that is, it is not specifically targeted at artificial arrangements that are driven by tax, and will apply to ordinary commercial transactions based on the tax system of the country in which they occur. GloBE can be contrasted with (for example) the hybrid mismatch arrangement rules recently implemented as part of New Zealand’s BEPS reforms, which target only specific arrangements that are considered to give rise to inappropriate tax advantages obtained from differences in tax treatments between multiple jurisdictions.

A possible criticism of the GloBE proposal is whether it limits the ability of sovereign nations to be able to make their own decisions about their economic settings, including their tax system.  Within a tax system there are a range of trade-offs which risk a focus on tax rate being overly simplistic  (for example, the rate of tax and the tax base, as well as the mix of taxes). It could also impact on the ability to offer tax incentives , such as the research and development tax credit in New Zealand.

In our view, it is critical that consideration be given to whether an appropriate balance is able to be struck between the complexity and fairness of the GloBE proposal. For example, overly simplistic ETR calculations may risk giving rise to an unfairly blunt instrument, whereas more detailed ETR calculations (with a new set of global rules for calculating taxable income) may risk imposing unwarranted compliance costs on businesses. Similarly, if the proposal were to proceed, it would be critical to ensure an appropriate size threshold is developed to ensure only the largest businesses are captured, given the potential for imposing disproportionate compliance costs on both businesses and revenue authorities.

Finally, if implemented we need to consider what this will achieve: if countries are already using their tax systems to incentivise or attract economic activity is there a risk that these changes will simply result in tax competition between sovereign nations being replaced with some form of other incentive competition?

Further information

For some further detail and more general Deloitte comment on the GloBE proposal and the next step, please refer to this Deloitte article.

To discuss the potential implications for your business, contact your usual Deloitte advisor.

December 2019 Tax Alert contents

• Inland Revenue: “No place to hide overseas income”
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• Corporate Tax Governance – From the Top Down… 
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• OECD consults on “GloBE” global minimum corporate tax rate
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