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Fairer tax treatment of global companies is on the way

Oct 29, 2021 | General, Market & The Economy | 0 comments

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One hundred and thirty-six countries, who are members of the Organisation for Economic Co-operation and Development (OECD), have agreed that the minimum company tax rate will be set at 15%. Only four countries remain outside of the agreement – Nigeria, Sri Lanka, Pakistan and Kenya.

This is a hugely significant agreement. For many years as globalisation became the norm for big companies, many of them used this complex world by finding the lowest tax rates available in certain jurisdictions and then setting up a head office there. They did this simultaneously to being granted low barriers to entry in most of these countries.

For example, Starbucks Coffee, which has hundreds of branches operating in the United Kingdom (UK), declared that they made losses year after year in the UK. They did this by a mechanism called Transfer Pricing. They would set up their headquarters in a lower tax jurisdiction and this company would sell the coffee beans to them at a huge premium. This price made the UK company unprofitable but they made huge profits where the company tax rate is significantly lower.

The devil will be in the detail and the small print. This agreement goes after the world’s largest companies with profits of €750m per annum. They believe that countries will collect an extra US$150 billion in new tax revenues annually as a result of the new rules and that the agreement “does not seek to eliminate tax competition” but puts agreed limitations on it. These companies can be considered “as the winners of globalisation”, adding that 25% of their profits above the 10% threshold will be reallocated to various jurisdictions. The OECD will develop rules to bring the agreement into effect in 2023. The United States will be the major winner of this tax windfall.

This landmark agreement will address global tax challenges of digitalisation and provide the certainty and stability that large businesses and governments need. What will be even more interesting is how tax is shared when something is sold online. For example, Apple is designed in California, parts are produced in China, serviced from India and head quartered in Ireland. What happens if you buy an iPhone through the internet? Does the country in which you are living get to charge VAT? Even within the US there are different rules in different states. This playing field will also have to be levelled.



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