When it comes to tax, some of the world’s smallest nations, like Lichtenstein (62 square miles) and the Cayman Islands (only 76 square miles for the largest island), have the biggest global impact.
This situation is swiftly changing, however. Pending rules by the G20 and Organization for Economic Cooperation and Development (OECD) are bringing complex new disclosure requirements as well as sweeping implications for entity management, structure and corporate strategy — all under a tight deadline. An overview follows of the landscape, what’s next and what boards, executive leaders and governance professionals need to know.
A “Race to the Bottom” Leads to “Forever Changed” Tax Dynamics
According to a landmark 2020 report by the Tax Justice Network, “Multinational corporations paid billions less in tax than they should have by shifting $1.38 trillion worth of profit out of the countries where they were generated and into tax havens, where corporate tax rates are extremely low or non-existent,” according to
While tax strategies like base erosion and profit shifting (BEPS) are largely legal, their repercussions are devastating to governments and public services worldwide. A “global corporate tax race to the bottom,” in the words of U.S. Treasury Secretary Janet Yellen, “is depriving economies of the revenue they really need to invest in infrastructure, education, research and development, and other things to spur growth and also impact corporate competitiveness.”
A new agreement by the G20 nations and framework by Organization for Economic Cooperation and Development (OECD) promises to level the playing field. Announced in July, the G20 agreement and its resulting reforms will, if ratified, “forever change the dynamics of tax incentives,” said Ashwani Gupta, Director Analyst at Gartner. The product of several years of discussion and negotiation, the reforms focus on two pillars:
- A levy on profit margins of over 10% for the world’s largest companies (firms with global annual revenues above $20 billion) in countries that remove all existing unilateral taxes on tech companies
- A global minimum corporate tax rate of 15%, which has the potential to raise up to $275 billion in additional revenues worldwide
These pillars will be brought to life through the OECD’s Framework on BEPS: “15 Actions that equip governments with the domestic and international instruments needed to tackle tax avoidance,” the OECD explained on its website. “Countries now have the tools to ensure that profits are taxed where economic activities generating the profits are performed and where value is created.”
Busy Times Ahead For Countries and Corporations
By October 2021, the OECD aims to finalize the details of its two-pillar approach. And in just two years, by 2023, the organization anticipates having a plan for implementation. “What is really interesting here is the timeline,” said Kate Barton, global vice chair for tax at EY. “I find that really lofty.”
Ultimately, this means a busy time ahead for both the public and private sectors. Individual governments will be writing new laws, adopting new tax treaty language, and repealing or amending policies that conflict with the new rules.
Meanwhile the parties paying the taxes will be making adjustments of their own. Gartner recommends that multinational corporations:
- Model scenarios: How much needs to be set aside for future tax payments? Will the new tax rules impact viability in specific markets?
- Update their models: It’s essential that models and technology systems reflect the new tax rules in each country of operation.
- Revisit risk: Multinational companies also update risk factors in their financial reporting. This includes accounting for risks stemming from incremental tax liabilities.
- Modify tax processes and technologies: The way companies calculate tax provisions and related compliance obligations may soon change. Tax leaders must assess the flexibility of existing processes and technologies to meet these changes.
- Reassess planning strategies: Tax impacts mergers, acquisitions, divestitures and all aspects of supply chain operations. How will leaders factor the G20/OECD changes into this decision-making?
- Investigate unclaimed incentives: Some countries may offer tax credits, such as environmental or R&D tax credits, to balance out liabilities under the new rules. Do not wait to identify and take advantage of these incentives.
What makes all the above even more complicated is that both the private and public sector activities will be happening at once as the granular details for each country get fleshed out. “I think that a lot of countries will reconsider their tax code and move up to that as a standard,” according to Barton. That being said, “There will still be some aspect of ‘what does the tax code in this country look like?”
Like all sweeping and multifaceted undertakings, the G20/OECD rules are a work in progress and likely will remain so leading up to the 2023 deadline and beyond. Corporate tax teams may feel like they are pilots learning the controls of a new airplane—while the craft is mid-flight.
An Accelerated Need For Timely, Accurate Information Across All Entities & Subsidiaries
Given their complexities and high stakes, tax issues always demand strong data and communication. And this is particularly true given the evolving situation today.
As the G20/OECD rules unfold and the 2023 deadline nears, it’s more important than ever for governance professionals to have access to the information they need, when they need it.
- General counsel, heads of legal teams and finance executives will require up-to-date assurance that all entities are complying.
- Finance and treasury departments will need entity data for tax reporting and financial modelling – e.g., M&A situations.
- Tax departments will require easy access to tax and jurisdiction information, to identify changes and adjust accordingly.
Furthermore, in today’s era of stakeholder capitalism, it’s likely that investors, activists, employees, the media and the public will also be watching — and asking questions. Corporate secretaries and legal operations teams will need accurate, up-to-date answers at their fingertips, specific to each entity and subsidiary across all the jurisdictions in which the enterprise operates.
With such sweeping ramifications across supply chains and borders, now is the time to start preparing for the new rules, requirements and business considerations of global tax reform.
