Abstract
The globalization of commercial exchanges and capital movements reveal new ways of obtaining value in economic activities, and the differences in the tax burden of companies, depending on where they reside, have become threats for countries to exercise the right to tax business profits generated in its jurisdiction. This problem, together with tax competition between countries, causes a transfer of tax bases towards countries with lower tax rates and tax havens. The lack of agreement in the international community on how to find a solution to the problems has caused several countries to choose to establish special taxes for certain activities of multinational companies in their jurisdictions, resulting in inefficient taxes. This paper analyzes the agreement reached in October 2021 in the G20 and in the OECD in which measures are adopted within the BEPS project to prevent the erosion of tax bases in market jurisdictions promoted by multinational companies. After studying different aspects, we found fundamental reasons for not having an optimistic view on the effective solution to the problems above: unrealistic forecasts on the amount of the new estimated tax bases for Pillar 1 and the high administration and compliance costs. In conclusion, it is not foreseeable that the tax bases derived from the provision of digital services will suffer a territorial redistribution. We do not expect that a minimum tax rate of 15% in corporate tax will be carried out effectively or that the benefits that are transferred to tax havens will be significantly reduced.
Introduction
In the last three decades, the nominal rates of the taxes levied on corporate income have fallen in most developed countries (FitzGerald & Dayle, 2018). This general trend suggests that factors external to the internal dynamics of each state have influenced political decisions, and one decisive factor in particular: the advance in economic liberalization that occurred with the fall of the Berlin Wall in 1989, including the boost to trade by the World Trade Organization a few years later (Rodrik, 2012). Added to this are the practices of financial innovation in the 1980s that redistribute risk more efficiently among market participants (Miller, 1986), the precursors of asset securitization and the creation of the financial derivatives market (Cooper, 1986; González & Mascareñas, 1999), all validated by the leading financial and capital markets regulator (Stiglitz, 2000), and the change in China’s growth model initiated in the 1980s (Naughton, 2007). The outcome was a new global economic paradigm that ran aground in the international financial crisis of 2008 and the subsequent period of social unrest in advanced countries caused by the resulting increase in inequality in the eyes of the public (Picketty, 2016; Krugman, 2018). This economic scenario also aids the understanding of the current dimension of the fiscal problem in most developed countries.
In terms of international income taxation, it is necessary to return to the first third of the 20th century, when the Economic Affairs Committee of the League of Nations approved an initial model agreement to deal with an old problem, namely, preventing double taxation on the income obtained by an entity in a State other than its residence. The UN subsequently promoted a model agreement defended by developing countries, also based on the principle of territoriality. In 1957, the Organization for Economic Cooperation and Development (OECD) took up the previous work of the League of Nations and UN to design a model tax treaty that would avoid the multiple international taxations of profits, although the main link used to tax international income was the person’s tax residence, with the territory assuming secondary importance. Finally, in 1963 the OECD presented its first model entitled “Draft Agreement on Double Taxation on Income and Wealth,” and in 1977 published the new model with the “Comments,” a rich compendium of casuistry and accumulated regulatory changes.
The purpose of the OECD model was to tax business profits in each company’s state of residence, including profits obtained in another State where it had no permanent establishment. It also incorporated the notion of “transfer prices,” a methodology to value the economic transactions between two associated entities in order to verify that the agreed price is consistent with the principle of free competition, thereby preventing the transfer of profits between companies in different states to optimize the business group’s global tax bill or for other purposes (OECD, 2022a).
The advance of globalization in the 1980s dramatically affected the modulation of the traditional points of connection (nexus) of income tax, namely, residence and territory (Antràs, 2021). The subsequent digital transformation of the economy has accelerated this process, increasing the proportion of intangible assets that are easily moved and very difficult to value. Digitization makes it possible to operate and obtain substantial profits in a territory without the need to have a physical presence there (Fuest et al., 2018), making the rules that regulate the nexus obsolete and fragmenting global value creation chains, which hinders their effective taxation by the jurisdictions affected (Dahlby, 2011). The 2008 crisis severely impacted public revenues, and many States began to demand solutions.
This paper aims to analyze the causes of the international taxation crisis, the unilateral solutions adopted, and the viability of the agreement in 2021. In addition to the introduction and conclusions, the next section is devoted to explaining the most significant changes that have occurred since the IIGM in the institutional, economic, and technological environment worldwide and whose impact has significantly affected the international taxation of corporate profits, with special mention of the breaking point represented by the international crisis of 2008. The attempts of international organizations and institutions to solve the three fiscal problems uncovered by the 2008 crisis are decsribed bellow: tax havens, alignment of territoriality with business profit and tax competition. Finally, the pending problems after the 2021 agreement, the expected impact and the persistent uncertainties are discussed.
Globalization and International Tax Framework
Combined Corporate Income Tax Rate.
Data extracted on 06 Feb 2022 10:49 UTC (GMT) from OECD. Stat.
It is not surprising that governments have chosen to convey an image of receptivity towards international investors, which on occasion borders on infringing international rules. It also tests the limits of what is allowed by these countries’ internal regulations and what the recipient companies themselves consider to be desirable, applying low regulatory standards, undermining the conditions of the labor market in other countries (Olney, 2013), and deliberately reducing the fiscal cost of capital (Ali & Klemm, 2013; Álvarez-Martínez et al., 2018), with real impacts that are not always perceptible. It is worth noting that some of the 25 countries represented are net capital recipients, while others are net issuers who jump on the bandwagon by reducing tax rates to prevent capital from migrating from their jurisdictions.
Despite the proposals of neoclassical economists regarding the non-transfer (via prices) of direct taxes in an economy under free competition, the reality is that most empirical studies have found evidence of a partial transfer that is difficult to pin down but which has an impact on both wages and corporate profits (Harberger, 1962; Felix & Hines, 2009; McKenzie & Ferede, 2017; Fuest et al., 2018; Naitram & Weinzierl, 2021). As indicated, it is possible to speak—albeit imprecisely—of fiscal costs for shareholders, and the best evidence is that even today, governments continue to use reductions in corporate income tax to attract capital to their jurisdictions.
The widespread competition surrounding international tax in recent decades has aggravated the effects of the 2008 crisis (Altshuler & Goodspeed, 2015), to the extent that fewer public resources are available to the States, and the type of income has modified the structure of the tax burden. It is a proven fact that capital income tax as a proportion of total tax revenues has continued to fall while tax on income from work has grown relentlessly (Klausing et al., 2021).
The globalizing dynamic begins with the solid economic growth experienced by many advanced and developing countries since the 1950s, thanks to the multilateralism that emerged from the Bretton Woods agreements during WWII (Rodrik, 2012). This was a broad commercial flourishing driven by meaningful tariff reductions on many products, which, after the meetings in Geneva and Havana in 1947, were consolidated in subsequent meetings by the GATT (General Agreement on Tariffs and Trade). More obligations were introduced for the 127 signatory States at the 1994 meeting held in the US, and it was agreed to create the World Trade Organization (WTO). While the GATT functioned as a system known as “rules by nations,” the WTO is an international organization whose agreements are more rigid and extend to the services sector (see General Agreement on Trade in Services of 1995) and the protection of copyrights. There are also more Member States.
This second phase of economic globalization, based on an intensification of commercial freedom and the movement of capital, and a greater relaxation of controls by central banks, ultimately widened public deficits (Figure 1) and considerably aggravated the public debt (Figure 2). At the same time, some corporate profits have continued to take refuge in territories with low or no taxation (Torslov et al., 2020). Not surprisingly, it is often said that the primary beneficiaries of economic globalization in the last three decades have been the owners of capital, regardless of where they are located (Rodrik, 2012; Stiglitz, 2017). Public deficit in the OECD. Public debt in the OECD.
By sector, the big technology and digital services companies have seen the most significant growth. While in 2006, there was only one technology company among the top 20 companies in the world in terms of capitalization, in 2021, eight of the 10 companies with the largest capitalization are directly related to technology and digitalization (PwC, 2021). This points to the scale of the qualitative change that has taken place in under two decades, with a proliferation of large MNCs who can engage in more aggressive tax planning that affects the level playing field principle (competition on equal terms) and find conditions of low or zero taxation with relative ease (Sorbe & Johansson, 2017). According to Sáez and Zucman (2021: 105 et seq.), thanks to the spread of intra-group transactions carried out at artificial prices, and high profits end up being registered in subsidiaries where tax rates are low, while low profits go where taxes are high.
The profound financial crisis in developed countries in 2008 caused a slowdown in economic globalization. However, nothing indicates that tax competition has declined (Table 1). The austerity measures in fiscal policy contrast with the permissiveness shown to business profits, producing a polarization (McCoy et al., 2018; Huebscher et al., 2021) that has outraged Western societies that were so severely punished by the economic crisis and leading to the rise of populist politicians and parties in the governments of many advanced countries (Piketty, 2016; Rodrik, 2017).
The Current Distribution of Taxation Rights in the OECD Model.
Source: Compiled by the author.
Although this model has always offered the theoretical advantage of greater interpersonal fairness, its weakness has been its lack of neutrality, as it alters taxpayers’ behavior in terms of where to obtain income, limits the fiscal sovereignty of the source State (which must waive certain tax income), and generates high administration costs in the state of residence (which must apply mechanisms to avoid double taxation and tax evasion). Designed for a context of economies that were not very open, progressive globalization has rendered the OECD model of income and wealth obsolete (Devereux et al., 2015), especially in terms of taxing business profits. In the last two decades, it has become evident that the OECD model on income taxation was beset with design problems from the outset, as the provision of digital services has grown in importance.
The decision was taken at the 2009 G20 summit in London to aim to end the era of bank secrecy and combat the concealment of profits in tax havens, which made it necessary to sign agreements for the automatic exchange of tax information with these territories. Likewise, at the summit in Los Cabos (Mexico), the OECD was charged with assessing the effectiveness of tax information exchange in practice and asked to conduct studies to prevent the erosion of tax bases and aggressive planning by MNCs.
Once the problem of transferring profits to tax havens had been addressed, the 2013 G20 summit in Saint Petersburg commissioned the OECD to review the right to tax corporate profits, where it adopted an action plan to prevent the erosion of tax bases and the transfer of profits (OECD, 2013a, 2013b). For the first time, the OECD considered putting an end to bad practices by MNCs and protecting tax bases while offering taxpayers higher levels of security and predictability. In the words of Rosembuj (2021), the new paradigm is the return of the state and the creation of a new global public domain, while the OECD itself indicated when modifying the transfer pricing guidelines that “Profits must be taxed in the place where the income-generating economic activities are carried out and where value is created” (OECD, 2015b: 17).
In September 2014, the OECD submitted to the G20 a package of recommendations affecting six of the 15 planned actions in the BEPS project. In October 2015 (OECD, 2015a), the results of the project were presented at the meeting of the G20 finance ministers (Lima), where the global losses from the collection of corporate taxes were estimated at between 4% and 10% (between 100 and 240 billion dollars per year). At the same time, the G20 urged the OECD to study solutions and proposed the participation of interested non-G20 countries, including developing countries. In June 2016, the OECD established the Inclusive Framework (IF), which by 2018 included more than 115 countries and territories (OECD, 2018a).
Many MNCs with businesses based on the digital economy can obtain more from tax planning instruments than companies operating in other sectors, which affects their global investment decisions (Cooper & Nguyen, 2020); they have therefore designed their supply chains to limit their taxable presence in high-tax countries. Nevertheless, certain jurisdictions have also granted extremely favorable tax treatments to MNCs (Allevato, 2018), especially through prior agreements with tax administrations (advance rulings).
Although the tax avoidance strategy known as the double Irish with a Dutch sandwich was not an invention of the digital economy, it has certainly reaped its rewards (Devereux & Vella, 2017; López Laborda & Onrubia, 2020). This has resulted in considerable erosion of the tax base as profits are shifted from countries with high taxation (or where the digital services are sold) to low-taxation jurisdictions. The countries that have done the most to find solutions to the erosion of tax bases within the OECD (OECD, 2019b) can be divided into two main blocks of interest: one formed by the EU and the United Kingdom, which propose solutions based on the concepts of significant digital presence and permanent virtual establishment; and the position defended by the US, based on the concept of residual profit of shared taxation (Rosembuj, 2019). The lack of agreement between the OECD States has led several to adopt individual initiatives to tax the income attributable to intangible assets differently.
From Unilateral Initiatives to the 2021 Multilateral Solution
While Turkey, India and some European countries preferred to levy a specific tax on digital services since it was the quickest solution, other countries opted to restructure their corporate income tax. In this second option, some experts chose to realign the taxable event with the market situation with no distinction between digital MNCs and other traditional businesses, instituting a new concept of permanent virtual establishment that would be applied when there was a significant digital presence in the market country where the income originates (Collin & Collin, 2013: 15). The initiative was discussed in the Interim Report of the OECD (OECD, 2018b) and was also included in the proposal for an EU Directive (European Commission, 2018a, 2018b): countries of origin should be empowered to tax corporate income from cross-border activities provided that the foreign company has a significant digital presence in its territory (Escribano, 2018), which would occur when any of the criteria for income threshold, users or digital service contracts are met. However, the first option consisted of creating a new tax, in addition to corporate tax, which would allow the countries of origin (where the service is marketed) to collect taxes based on where the digital companies' users are based (Kofler et al., 2017).
Unilateral Initiatives
When the European Commission finally launched a proposal for a directive to address the fiscal challenges associated with the digital economy (European Commission, 2018a, 2018b), the project failed due to the opposition of Ireland and some Nordic countries at the ECOFIN meeting of May 2019, and some EU Member States began to take unilateral initiatives to create a new tax category. The most successful of all the academic proposals to implement new taxes was to create a tax on digital services (TDS), a kind of “compensation” tax (equalization tax) already contemplated by the OECD in the Final Report on Action 1 of the BEPS (OECD, 2015a); the aim was to offset the loss of income tax revenues, but the development of new business models has reduced its effectiveness.
The vocation of the new TDS is to tax large non-resident companies that have a significant economic and market presence in their country of origin but do not meet the requirements to become a permanent establishment. In 2016, India was the first country to implement a TDS by applying a 6% rate on income from digital transactions, instrumentalized through a tax withholding on payments to foreign companies for online advertising services (Wagh, 2016). Austria, France, Hungary, Poland, and Spain had a TDS by 2020, while other states such as Belgium, the Czech Republic and Slovakia had a proposal for a regulation, while Turkey also had an ISD at the end of 2020. Although almost all the texts of the EU States were intended to be substantially inspired by the proposed Directive, their structure differs in practice (Allevato & De Vito, 2021).
Since the TDS takes gross income and not profits as its tax base, it cannot be classified as a tax on profits, even if it requires taxing the profits of certain MNCs in a jurisdiction. The first obstacle facing all these regulations is the lack of fiscal neutrality in investment decisions since it is applied exclusively to digital service transactions, thus favoring all other activities, as pointed out by Olbert and Spengel (2019). Added to this is the uncertainty about the real incidence of the new tax, as there is reasonable doubt as to whether it will effectively fall on the service provider or weaker third parties. There is extensive economic literature that maintains that the market power of MNCs allows the tax burden to be transferred to consumers (Fullerton & Metcalf, 2002), suppliers/advertisers (Dyreng et al., 2019) and employees (Fust et al., 2017).
In terms of the tax design and the tax base is made up of revenue, revenue may be within the applicable thresholds even though the company is operating at a loss. This could distort investment decisions (Bethmann et al., 2018), put start-ups at a disadvantage (Cullen & Gordon, 2007), and create additional incentives to move profits (De Simone et al., 2017). TDS advocates also consider that VAT should only be seen as a deductible expense in the tax base, which could generate cascading effects on transactions carried out between independent platforms (Di Tanno & Marchetti, 2019).
Both the failed EU proposal and the TDS developments considered cross-border and domestic transactions, given the potential problem of non-compliance with EU and World Trade Organization regulations (Kofler et al., 2017). However, these countries have applied a diversity of criteria to limit the concept of digital transactions and set the threshold for significant economic presence. While the Spanish TDS applies to advertising services aimed at users, online intermediation services and data transmission services, following the draft EU Directive and similar to the Italian tax system, the tax in Austria and Hungary covers only online advertising transactions (Asen, 2020).
From an operational point of view, it is essential to determine who is responsible for the tax concerning a state’s administration. India has used the figure of the resident person required to withhold the tax in its territory as being responsible for the tax, as they are the client of the digital services; this is a suitable option for a compensation tax such as the TSD, although it means the withholding agent bears the burden of compliance. On the other hand, transferring the burden of compliance to the service provider implies a lower collection efficiency in the case of cross-border transactions, especially regarding B2C operations, increasing both the complexity of the tax management and the monitoring costs (Allevato & DeVito, 2021).
In the United States, the “Tax Cuts and Jobs Act,” approved by Congress at the end of 2017, came into force in 2018. One difference with the European initiatives is that it does not specifically contemplate profits from digital services but rather the extra return obtained from intangible assets. In summary, these are some key points of the reform: 1. The general corporate tax rate is reduced from 35% to 21%, with an exemption for dividends received by North American corporations from controlled foreign corporations (CFCs). A temporary transition tax of 15.5% was applied to income not repatriated at the end of 2017 (for cash) or 8%. 2. The GILTI (global intangible low-taxed income) was adopted for application to the intangible income obtained by US corporations established abroad at the time of its accrual; this was the income obtained by foreign subsidiaries more than a tangible profit represented by a 10% return on their depreciable tangible assets. The excess income is taxed at 10.5% (13.125% as of 2026). This measure partially neutralizes the exemption on dividends in cases where the GILTI is applied and covers CFCs, that is, corporations over 50% of which are owned (by vote or value) by US persons, where each one owns more than 10% of the corporation (by vote or value). 3. The BEAT (base erosion and anti-abuse tax) is a tax that applies only to companies with average sales of more than 500 million dollars. The objective is to penalize services provided to a US company by any of the group’s foreign subsidiaries. The tax base is calculated similarly to corporate income tax, but certain payments to related entities cannot be deducted, including payments for services (especially those that do not have withholding at source). The planned tax rate was 5% for 2018, 10% for 2019 and 12.5% for 2026.
As will be seen later, the US GILTI has been used as a reference model by the OECD in the solution adopted in October 2021 for the so-called Pillar 1. In any case, it is surprising that the unilateral initiatives of all countries except the US have focused on taxing income imputed for providing digital services from abroad, revealing a certain lack of interest in reaching an agreement to tackle international tax competition caused by the States themselves. Klausing et al. (2021) and Cobham et al. (2021) argue that a unilateral initiative or a few countries would have been sufficient to end the race to the bottom in corporate tax rates.
In January 2019, the OECD disclosed that it was working on a side project to address hitherto unresolved issues of base erosion and profit shifting (OECD, 2019a), noting that the proposal aimed to enable a State to tax any profits that another jurisdiction has decided not to tax, or to tax them at a low effective rate; this was the first time that the so-called Pillar 2 appeared in a document. At the end of 2019, the GloBE (global anti-base erosion proposal) initiative for minimum taxation (OECD, 2019c) was incorporated as Pillar 2, extending the initial scope of the BEPS project, which did not comprehensively address low taxation.
By the second half of 2020, several central OECD countries had a TDS. The negotiations were at an impasse, and the European Commission had warned in July that it would continue with its tax proposals for digital businesses and MNCs. In November, the OECD set a deadline to reach an agreement before mid-2021. The main points of disagreement between the members of the inclusive framework regarding Pillar 1 were the following (López Laborda & Onrubia, 2020; Prescott-Haar & Day, 2020): a. Several countries wanted the new rules to apply only to digital companies, while others—mainly the United States—maintained that they should be generalized to companies in any sector. b. Technically, the calculation method was considered complex and failed to avoid double taxation by taxing estimated profits through percentages (in market jurisdictions) and actual profits measured by accounting (in the jurisdiction of the group’s residence). c. The compliance costs for companies are high, as they must identify the components of their profit in all market jurisdictions, in addition to the administration costs imposed on market jurisdictions for supervisory purposes.
The Pillar 2 positions concerned mainly:
a. The application of the GLoBE minimum tax, the income inclusion rule (IIR) and the undertaxed payments rule (UTPR). b. The reconciliation of the accounting IFRS for the accounting principles applied in the different countries of residence of subsidiaries in the same group could give rise to higher-than-expected effective rates. c. The coexistence of GloBE with other minimum tax regimes unilaterally approved by other countries, especially the US.
In August 2020, the UN launched its digital tax proposal, adding an article 12B to the tax treaty model (UN, 2020) and creating a tax on an estimated gross yield for the income derived from the provision of “automated digital services,” applied as a withholding tax (as in India), and leaving countries free to choose the type of tax.
Multilateral Agreement
Prior to the 2021 agreement, the OECD approved a multilateral regulatory proposal document at the Paris meeting (24 November 2016) to review several gaps in the existing international agreements and implement the agreed changes in a synchronized and efficient manner without the need to bilaterally renegotiate each one (OECD, 2016). This is the so-called multilateral convention to apply measures related to tax treaties to prevent the erosion of tax bases and profit shifting that came into force on 1 July 2018.
Finally, an agreement was reached at the G7 (5 June), the G20 (10 July) and the OECD (1 July and 8 October) of 2021, in which 137 of the 141 countries in the inclusive framework, accounting for 95% of the world’s GDP, decided to promote a common international framework to guarantee the taxation of large MNCs. Based on the work program set out by the OECD (OECD, 2019b), a reform was proposed based on two pillars: Pillar 1, which focused on assigning taxation rights to the source and residence States, calculating the tax bases and regulating the nexus for certain digital activities carried out by MNCs; and Pillar 2 (GLoBE), which develops the principle of protecting the tax base to prevent its erosion and contemplates the right of another jurisdiction to demand the tax when not claimed by the primary jurisdiction, or when it is claimed but at a lower level than the established one (right to tax back). This is the most important reform in a century of international taxation.
2021 agreement on BEPSs (OECD): Pillar one.
Figure 3. 2021 agreement on BEPSs (OECD): Pillar 2.
It is to be hoped that the agreement reached in October 2021 will soon give rise to a new EU Directive and the revision of the TDSs recently established by some countries since national initiatives have a greater efficiency cost for economic activity and negatively affect tax collection (Olbert & Spengel, 2019; López Laborda & Onrubia, 2020: 22). By the end of 2021, all the EU Member States had expressed their willingness to sign the agreement, which does not rule out problems in preparing the community Directive.
Pending Issues and Expected Impact of the BEPS Project
Despite the painstaking work done to develop Pillar 1 and Pillar 2, the newly agreed tax mechanism cannot yet be said to be definitively concluded. If the expected results are not achieved, the four countries that have not signed the October agreement may be joined in the future by others that have. For example, according to data from Facebook for 2021, the excess profit would be as much as nine billion dollars on an obtained profit of 19%, considering that the company attributes 53% of its income in the third quarter of 2021 to users outside the US. Nor will it be easy to compare the data provided by the company; as occurs in many other cases, some countries do not agree that thresholds for the “normal” rate of profit should be set at 10% and income at a minimum of 20 billion euros.
In the case of Pillar 1 measures, the October 2021 agreement incorporates a plan to lower the income threshold to 10 billion euros over time, bringing more MNCs within the net of the tax. Despite everything, many countries would like all profits to be taxed according to where they were obtained. However, this would mean that over half of Facebook’s profits would be taxed outside the US and be seen as an affront to a fundamental tenet of the OECD model agreement on income and wealth (the criterion of residence to tax the taxpayer) and reopen old debates about the lack of neutrality of this model in terms of the origin of the income (Ruding, 1992) and the taxpayer’s residence (Serrano Antón, 2019). The great complexity of the future multilateral agreement (MLA) and its explanatory declaration, and the model rules that are still under public consultation (OECD, 2022b), mean there is still no indicative date for its entry into force 1 .
However, due to the possibility of transferring the tax, the actual incidence of this new tax system applied to MNCs is not yet clear. For example, Google and Amazon have announced that any taxes on digital services related to advertising will be passed on to advertisers (service providers). The new system could therefore reduce the number of advertisements, which would benefit consumers. Liberini et al. (2021) argue that as the advertisements will be more expensive, advertisers in countries that apply this taxation will be worse off, which may significantly harm small businesses that rely on digital ads to reach specific customers. In short, given that the tax-transfer will depend on the supply and demand of services on the digital platforms operating in each jurisdiction, it is still difficult to predict which economic agents will bear the new tax and how much the irrecoverable loss of efficiency will amount to.
Although Pillar 2 respects the fiscal sovereignty of the States, GloBE breaks with the previous principle of limiting itself to combating harmful tax competition or cases of double non-taxation and reducing tax competition in general. The chain of applications stemming from the IIR rule, combined with the UTPR rule to avoid relocations, highlights how far GloBE is designed to tax income anywhere, regardless of where, provided there is no income tax elsewhere at a lower effective rate than the proposed minimum tax (Navarro Ibarrola, 2021). However, Ogawa (2021) rough out a model on the expected impact of the Pillar 1 measures concerning the objectives set by Pillar 2, concluding that it could contribute to transferring the problems of international tax competition to the tax designed by Pillar 1, necessitating a joint impact analysis.
Everything indicates that the efforts to find a broad consensus in the inclusive framework have left considerable uncertainty about the expected results of the BEPS project. For example, the OECD recognized that the IIR and UTPR rules required modifications in the agreements to prevent double taxation and achieve their compatibility (OECD, 2020a). However, the OECD document (2021) on GLoBE does not contemplate this issue, and, as pointed out by Maarten de Wilde (2022), a modification of the tax treaties is required before these rules can be applied. They could also affect the compatibility with the area of European Union law that safeguards fundamental freedoms and establishes the general principle of non-discrimination (Devereux et al., 2020: 53; Navarro Ibarrola, 2021: 84), although the EU Council previously launched a proposal for a Directive on minimum taxation on 12.22.2021 (COM(2021) 823 final).
Furthermore, the complexity of developing Pillar 2 rules (OECD, 2021) in 2023 is probably underestimated. Not only does it face the problem of the possible modification of tax treaties, but it also raises significant local political challenges, namely, the difficulties in approving the Build Back Better tax package in the US Senate to align its legislation with the OECD proposal, the reluctance of some EU States—including France—to adopt the regulations, or the United Kingdom’s intention to declare financial institutions in London exempt.
Estimates of the potential impact of the BEPS model on revenue in the different countries are still scarce. Fuest et al. (2019) calculate results for 40 countries, including seven territories with low or no taxation, regarding the effects of the two Pillars on tax collection and the relative attractiveness of countries for MNCs. They estimate that the number of winning and losing countries with the application of Pillar 1 is similar in tax revenue but produces more winners than losers in terms of “attractiveness” for the location of MNCs; whereas—as expected—the revenue gained in the case of Pillar 2 is generalized, although if tax havens do not adjust their taxation in response to this new rule, there will be more losers than winners in the attractiveness category.
Cobham et al. (2019) used country-by-country reports from US MNCs for 2016 to calculate “Amount A” in Pillar 1. Simulations indicate that the model particularly favors high- and upper-middle-income countries, which would see increases in their revenues. However, in specific simulations, tax collection in lower-middle-income jurisdictions could even decline, so the authors proposed using sales and employment as criteria for sharing the residual profit between market jurisdictions. Some organizations have positioned themselves in favor of these types of reports being public and not reserved for certain governments, favoring the transparency of large companies and greater efficiency and fairness of tax policies (Freedman, 2019; Tax Justice, 2020).
Devereux et al. (2020) estimated the potential impact of Pillar 2 on a set of countries in a global and a country-by-country scenario. For the global scenario, the authors found that a minimum rate of 10% would increase the collection of corporate taxes paid by controlled foreign entities by 4%. In the country-by-country scenario using the ORBIS database, the application of a minimum 10% corporate tax rate would add 32 billion euros to the global collection, around 14% of the taxes paid by controlled foreign entities, which represents less than 2% of global corporate tax revenues and 0.3% of corporate profits. The authors also conclude that Pillar 2 would not significantly impact the convergence of effective average rates between countries.
Finally, the OECD published an impact study (OECD, 2020b) using a database of more than 27,000 business groups from more than 200 states and jurisdictions and including country-by-country reports for 2016 and 2017. The calculations suggest that the global collection for the tax could increase by up to 100 billion dollars if the US GILTI regime is included, approximately 4% of the current global collection. The reallocation between market jurisdictions caused by Pillar 1 could be as much as 100 billion dollars, with a slight increase in the global collection.
Conclusions
The current rules that govern the international taxation of income based on the OECD model use the taxpayer’s residence as the central connection point and nationality in second place. This contrasts with taxes on consumption, which are levied in the jurisdiction it occurs. Although tax regulations usually include additional rules to prevent the tax base from being artificially relocated, the problem of the relocation of corporate profits has been of particular concern during the last three decades due to the momentum of globalization.
The 2008 financial crisis spurred the G20 and the OECD to launch a search for solutions. This began by tackling the problem of tax havens and continued with a program (the BEPS project) to find a formula for taxing digital services wherever value is generated for the company, limiting the right of the jurisdiction of residence. The decision to implement solutions to combat international tax competition came last, highlighting the disparity in the criteria.
The lack of agreement within the OECD as to the key measures to be taken has given rise to a series of unilateral initiatives by some States to tax the digital services provided by MNCs, even though they are technically relatively inefficient. Finally, when an agreement was reached in extremis in October 2021 on the general outlines of these potential measures, it was done without yet having available all the technical aspects necessary for the implementation of Pillar 2, whose entry into force is planned by 2023; there is also an even more significant delay in the completion of Pillar 1, where four documents remain to be developed. Although the OECD’s impact forecasts are optimistic, other studies reach less satisfactory conclusions.
In contrast, the resilience of the problem of international tax competition and the concealment of income in tax havens does not augur a rapid change in the behavior of States or companies; it should be borne in mind that the last hurdle before the agreement was to fix the minimum corporate tax rate, which will probably not significantly modify the current incentives to attract foreign capital and increase the concealment of income. The limited redistribution of collection rights expected from the application of Pillar 1 of the agreement, together with the growing importance of digital economic activity in the immediate future, does not presage significant improvements in the coming years.
Footnotes
Declaration of Conflicting Interests
The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author(s) disclosed receipt of the following financial support for the research, authorship, and/or publication of this article: This work has been developed within the Vitoria Group for Economic and Social Research, with financial support from the European Regional Development Fund (ERDF).
