There have been many other international tax proposals over the years to end, or at least reduce, ‘tax competition’. They’ve almost suffered from a fatal flaw: they reward countries that don’t follow the crowd. It’s a particular problem with the various unitary tax proposals where every country taxes companies on the basis of the same formula (which typically takes into account the location of sales, employees and assets). That creates a massive incentive on countries to apply a slightly different formula – tada, tax competition is back! And an obvious incentives for other countries to simply not sign up at all.
The OECD global minimum tax is much smarter than that. It has three main components:
When a multinational group is headquartered in a country, that country gets to apply a ‘top-up’ tax if the multinational has subsidiaries in a country where it pays a less than 15% effective rate of tax.
So if a UK-headquartered widget-making multinational makes £100m of profit in its French subsidiary, which pays £20m in French tax, then the UK charges no top-up. But if it also has a Cayman Islands subsidiary which makes £100m of profit, on which it pays £0 of tax, then the UK applies a top-up tax of 15% x £100m = £15m. Naturally, the details are a bit more involved than this.
Countries have the option of applying a domestic 15% minimum tax themselves. So, in the above example, the Cayman Islands might think it’s just leaving money on the table. The multinational is going to pay £15m on its Cayman Islands profit, but will be paying it to the UK. If the Cayman Islands instead collects the £15m itself then it makes no difference to the multinational, but it makes £15m difference to the Cayman Islands. And the UK doesn’t get to collect the £15m. It remains to be seen if countries like the Cayman Islands will do this. But plenty of other countries will – including the UK.
So we can expect a multinational to pay some 15% minimum tax in the countries where it has subsidiaries, and then a bit more in its headquarters jurisdiction (topping up to 15% the tax on the profit it makes at home, and adding on additional top-ups for the subsidiary countries that don’t have domestic minimum taxes).
What if the headquarter country in fact doesn’t implement the minimum tax? On the face of it, that makes it a wonderfully attractive headquarters country for any multinational who wants to continue to keep the benefit of tax havens (because their 0% tax would never be topped up). And indeed it would be a fantastic option for a tax haven that wants to attract multinationals’ headquarters. But at this point, we see the brilliance of the OECD’s design (for which successive British Conservative governments should take some of the credit). The top-up tax which the headquarter country should collect, but doesn’t, is instead collected by all the countries where it has subsidiaries under the ‘under-taxed payments rule’ (UTPR).
So here’s what happens if the UK doesn’t implement the global minimum tax:
The UK loses the ability to apply a ‘domestic minimum tax’ to the profits of foreign multinationals operating in the UK. Those multinationals still pay the tax, but they pay it (most likely) in their headquarters jurisdiction. The UK leaves tax on the table.
The UK loses the ability to apply the global minimum tax to the profits of UK-headquartered multinationals. Those multinationals will still pay the tax, but they’ll pay it in little chunks in all the countries where they operate over the world. The UK leaves more tax on the table.
Those little chunks are extremely complicated chunks. The UK multinationals will consider this a bad result: they’d much rather pay the tax in one go in the UK, rather than have to go through a set of rules in each subsidiary country (and they’re rules that the countries won’t be very used to operating, and very plausibly will work out a bit of a mess).
There is no upside here. Failing to implement is worse for both HMG and UK plc.
There have been many other international tax proposals over the years to end, or at least reduce, ‘tax competition’. They’ve almost suffered from a fatal flaw: they reward countries that don’t follow the crowd. It’s a particular problem with the various unitary tax proposals where every country taxes companies on the basis of the same formula (which typically takes into account the location of sales, employees and assets). That creates a massive incentive on countries to apply a slightly different formula – tada, tax competition is back! And an obvious incentives for other countries to simply not sign up at all.
The OECD global minimum tax is much smarter than that. It has three main components:
When a multinational group is headquartered in a country, that country gets to apply a ‘top-up’ tax if the multinational has subsidiaries in a country where it pays a less than 15% effective rate of tax.
So if a UK-headquartered widget-making multinational makes £100m of profit in its French subsidiary, which pays £20m in French tax, then the UK charges no top-up. But if it also has a Cayman Islands subsidiary which makes £100m of profit, on which it pays £0 of tax, then the UK applies a top-up tax of 15% x £100m = £15m. Naturally, the details are a bit more involved than this.
Countries have the option of applying a domestic 15% minimum tax themselves. So, in the above example, the Cayman Islands might think it’s just leaving money on the table. The multinational is going to pay £15m on its Cayman Islands profit, but will be paying it to the UK. If the Cayman Islands instead collects the £15m itself then it makes no difference to the multinational, but it makes £15m difference to the Cayman Islands. And the UK doesn’t get to collect the £15m. It remains to be seen if countries like the Cayman Islands will do this. But plenty of other countries will – including the UK.
So we can expect a multinational to pay some 15% minimum tax in the countries where it has subsidiaries, and then a bit more in its headquarters jurisdiction (topping up to 15% the tax on the profit it makes at home, and adding on additional top-ups for the subsidiary countries that don’t have domestic minimum taxes).
What if the headquarter country in fact doesn’t implement the minimum tax? On the face of it, that makes it a wonderfully attractive headquarters country for any multinational who wants to continue to keep the benefit of tax havens (because their 0% tax would never be topped up). And indeed it would be a fantastic option for a tax haven that wants to attract multinationals’ headquarters. But at this point, we see the brilliance of the OECD’s design (for which successive British Conservative governments should take some of the credit). The top-up tax which the headquarter country should collect, but doesn’t, is instead collected by all the countries where it has subsidiaries under the ‘under-taxed payments rule’ (UTPR).
So here’s what happens if the UK doesn’t implement the global minimum tax:
The UK loses the ability to apply a ‘domestic minimum tax’ to the profits of foreign multinationals operating in the UK. Those multinationals still pay the tax, but they pay it (most likely) in their headquarters jurisdiction. The UK leaves tax on the table.
The UK loses the ability to apply the global minimum tax to the profits of UK-headquartered multinationals. Those multinationals will still pay the tax, but they’ll pay it in little chunks in all the countries where they operate over the world. The UK leaves more tax on the table.
Those little chunks are extremely complicated chunks. The UK multinationals will consider this a bad result: they’d much rather pay the tax in one go in the UK, rather than have to go through a set of rules in each subsidiary country (and they’re rules that the countries won’t be very used to operating, and very plausibly will work out a bit of a mess).
There is no upside here. Failing to implement is worse for both HMG and UK plc.
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