Tax across borders: the journey to a global minimum corporate tax rate

Rebecca Archer

Welcome to Navigating the New Normal, Grant Thornton's podcast exploring trends in business and the marketplace. My name is Rebecca Archer and today I'm joined by Vince Tropiano and Brett Curtis, both partners in our tax team at Grant Thornton.

Today, we're talking about the journey to a global minimum corporate tax rate. The new tax system, expected to take effect in 2023 has been agreed to by 132 countries after meetings held by the G20 and the Organization for Economic Cooperation and Development in July.

Welcome Vince and Brett!

Firstly, back to basics. What's the tax situation for multinationals at the moment? Brett, let's start with you.

Brett Curtis

Okay. So basically what we've got in place in terms of taxation for global multinational, there's quite an aged or historic system. So the way it works currently is under a treaty network, big global corporations, multinational corporations, aren't taxed in a foreign jurisdiction unless they've got some form of presence – that’s called a permanent establishment under the treaty. So what's happened is with the digital age, the digital commerce has changed the business model. And a lot of these big technology multinationals in particular, are selling into jurisdictions without any presence or providing services and foreign jurisdictions without the presence, which means they're pretty much not paying tax there. So that's caused a lot of problems with the existing framework, and has actually seen the rise of quite a lot of countries imposing, unilaterally outside of treaties, not income taxes, but taxes on or levies on gross income. So there's been a lot of resistance of countries trying to claw in tax to their jurisdictions.

Similarly, with low tax jurisdictions or havens, so called tax havens, big corporations can move IP or assets or business operations to those jurisdictions and just literally minimise their global corporate tax rate. So that's where we're at the minute.

Vince Tropiano

And picking up on a couple of Brett’s points – one thing, of course, to note is that there's a diverse range of corporate tax rates across the globe, from very low and concessional rates, up to some substantially high rates. And also, as Brett mentioned, there's a number of countries which have gone alone in introducing rules aimed at targeting multinationals. We have a number of them here in Australia, specifically dealing with multinationals of a certain size and how they seek to do business with, interacting with, Australian customers.

So what we have is a situation where there are a number of countries looking to provide some great attractive tax rates to encourage foreign investment, and then there's a number of other countries that probably are not in the same position to do so that are looking to set up some rules and set up some boundaries to limit those sort of benefits. So, the multinationals probably have a substantial range of different targets on their back, depending on which jurisdiction they're moving into.

Rebecca Archer

Right, so Vince – what specifically brought about this change, what can you narrow that down to?

Vince Tropiano

The rules which we have in place were not built for multinationals. They were built for smaller domestic operations; they were built for situations where there was a lot less global traffic and the global economy wasn't as well developed as it is. So what's happened is that this is a conversation that's been going for decades in terms of how we manage tax across the internet and tax across borders.

So the movement over the last month has really been something that's been bubbling along for many decades. Even in Australia, we've released reports on taxing the Internet going back into the late 90s. So it's 2021. So these conversations are happening over the last few years, we've introduced rules again, as I said, aimed at targeting multinationals in terms of how they do business. So it's about providing, or at least the push with the G20, is providing a level playing field such that business decisions aren’t being made in such a manner to take advantage of tax rates, but really trying to protect local tax and to encourage, I guess global activity on a more equitable scale.

Rebecca Archer

Okay, and so it's 132 of the 139 OECD countries that have agreed to it. Could you explain the agreement for us, Brett?

Brett Curtis

Yeah, this is, I guess at a conceptual level, it's easy to talk to it, but I think the point to stress here is that there's a lot to be worked out, there's a lot of detail to be worked out. So it really is at this stage, conceptual and there's a lot of complexities involved, even at this stage that need to be ironed out. And there are still a few jurisdictions that don't agree with some terms of it. So it’s basically referred to a two pillar approach. The first pillar and it's very important to stress again that the first pillar only is going to apply to the world’s biggest organisations – the world’s top 100 companies with global revenues of about €20 billion. Essentially, this will be the big, big multinationals, and pillar one is going to operate to essentially on a more equal basis, allocate profits to jurisdiction when they supply those goods and services where they're not taxed under the existing framework. So it's a profit reallocation methodology, if you like. So it's basically a more equitable basis of: where is the value created, that's where you’re going to get taxed more.

The thing, second pillar too obviously, is a minimum global corporate tax rate. So it's really stopping the race of bottom on tax rates and using tax rates as an incentive for multinationals to place operations there. So it's going to impose a global minimum tax rate of 15%. The interesting thing here is that this proposal will only will kick in at a much lower rate of essentially about a billion Aussie dollar revenue corporations. So, and I wouldn't be surprised if that also triggers down into smaller organizations or multinationals down the track as well. So basically, it's to stop tax haven type of behaviour. So, yeah, so just summarizing global minimum corporate tax rate of 15%; and it’s to stop watching nationals trying to shop around tax havens or low tax jurisdictions. And it’s that profit reallocation for the big multinationals.

Rebecca Archer

And so you mentioned that 15% as a minimum that was agreed to by the G20 meeting in July. The next meeting is in October and countries have to figure out how to implement the system before then. Where exactly does Australia stand, Vince?

Vince Tropiano

Look, that's a really interesting question, because the conversation’s around the 15% minimum, and we in Australia and nowhere near that. We're looking at rates, looking to bring our corporate rate down to say 25%. It's currently just a smidge over. Most companies in Australia are still taxed at 30%. So for us, it's a challenging question because there's no way that we're going to be reducing our corporate rate to 15%. So, in terms of a level playing field or at least being in a competitive environment, if all the other jurisdictions tend to roll down to that level, we're going to have issues.

I mean, interestingly enough, we're not the only ones. I mean, a lot of this, a lot of this conversation now has come about, because President Biden has gone to the table as part of this exercise. The US originally wanted 28 and they rolled back to about 21; so 15% is a middle ground for them. But quite obviously in our current position and as a probably a net recipient of global goods and services, we're going to have a bit of a challenge with trying to match that sort of number and there's no way we're going to get anywhere at this point in time.

Rebecca Archer

And what about those countries like Ireland and Hungary who have made themselves an attractive investment hub by implementing a very low corporate tax rate 12.5% in the case of Ireland?

Brett Curtis

Yeah, well, funnily enough, Ireland was a jurisdiction that was wanting a minimum corporate tax rate of 12.5%, funnily enough. Of course it's now reached that consensus of 15%. Look in short, Ireland's going to have a problem to the extent that it used its tax rate as an incentive for investment. They're going to have to look at other ways of attracting investment. So, and it's important to understand how the minimum corporate tax rate will work if the jurisdiction taxes at less than 15%, the parent or the top parent jurisdiction will have to pay the additional top up tax. So if Ireland doesn't tax at 15%, it taxes at 12.5%, and a UK multinational, in the UK they'll pay that top up tax. So essentially, Ireland will be subsidising the UK in that scenario, so there's no point in not taxing at the minimum corporate tax rate. So, and there's a lot, it's not just Ireland, I think it's 35 other countries that have a corporate tax rate of less than 15%, so it's going to it's going to impact a lot of jurisdictions.

So what we're likely to see is governments will look to incentivise in ways other than the corporate tax rate; subsidies, grants. So we'll probably see, or what we expect to see is a shift to competition on non-tax platforms, or non-profit based taxes that could be property taxes, social security or some kind. So it's going to be really important as to how they define and implement this minimum global corporate tax rate, because the broader that is, it will remove the ability to compete on, you know, kind of side taxes and other taxes that people try to use to still keep taxes in the game as an incentive. So it's going to take away tax is a driver for investment – level the playing field, so to speak.

Vince Tropiano

And I think that's right. I mean, quite often we would talk to clients about making commercial decisions rather than making decisions based on tax rates. Obviously you don't want to pay more tax than you need to, but this will move it towards more of a commercial discussion and as Brett said, there'd be a greater focus less on just tax rates, but looking at other incentives and support. So there might be some work about it, R&D concessions, or various other investment concessions that may not fall within the definition of the corporate tax rate, but may still be looking to provide some other benefits or incentives to encourage investment, to encourage development, manufacturing and the like.

Rebecca Archer

And so at the end of the day, what does this mean for Australian businesses, especially those with operations in other countries?

Brett Curtis

Well, I think the thing to really think about here is the profit reallocation – pillar one. It's only going to, at the moment under existing proposals, apply to those really big multinationals, so only a couple of Australia's top companies. Now, that's not to say that couldn't change. So I guess the real point here is there's a lot to be worked out and the eventual measures aren’t yet known. And so the real thing is to watch what's happening and to be flexible as to your approach down the track, because things could change. The minimum corporate tax rate, you know, as I said, that ticks into what we call Significant Global Entity revenues – one billion Aussie dollar group companies. And I wouldn't be surprised if that again gets smaller down the track, and will kick in sooner. So I think, you know, just has Vince said, really, when you're looking to establish operations offshore or how you set up your global group structure, tax is just such a lesser driver, less of an incentive. You really need to look at your commercial reasons, you supply chain reasons, other commercial reasons as opposed to tax.

Rebecca Archer

I think we've probably raised some more questions than we've answered today, but for businesses who are looking to prepare themselves, what would you say? What advice maybe do you have?

Vince Tropiano

Well, I think as we both said, the corporate tax rate is going to be less of a structural feature in any sort of planning than it would be if we get down to a homogeneous rate of 15%. As I said earlier with Australia, our corporate tax rate’s higher than that. There are rules around Australian businesses setting up business offshore and some of those profits being shipped back and taxed in Australia. So you need to take into account how the foreign investment rules would work when you're setting up your businesses overseas. For purely domestic business, it's probably not a great change, except to the extent that there will be more countries now that would have an effective corporate rate less than hour. So there may be greater competition. So you need to take that into account. We've still got a number of countries who are not part of the OECD or the G20, I mean, we have a lot of countries in Asia that have some fairly low corporate rates and they're probably some of our greatest competitors for manufacturing and the like.

So I think a lot of the challenges which Australian businesses have would continue to exist, may be exacerbated in other ways. And probably we just need to take a look at how some of those foreign investment rules would work when they're looking to set up offshore, but they won't immediately going well, we'll go to Ireland for example, because it's a 10% corporate rate. There may actually be other opportunities now because those lower taxed jurisdictions may not exist. So it may give rise to greater scope in choosing which jurisdictions to move into because the tax rates may be somewhat similar now.

Brett Curtis

And I think just to finally add to that, I think given the uncertainty still at the stage, I think it’s another two years before implementation is expected. In terms of any Australian businesses expanding offshore, I think you just need to keep one eye on the future and keep things flexible, because things are going to change and I think you just need to keep that flexibility in terms of your group structure, or where you think you may be doing business, because if you kind of lock yourself into something you can't change, that may not be the best thing to do at the moment.

Rebecca Archer

Certainly going to be an interesting one to follow and watch from here. Vince and Brett, thank you so much for your time – can people track you down on LinkedIn, phone or email if they'd like to talk more?

Vince Tropiano

Of course, of course they can. All our details are readily available!

Rebecca Archer

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