At a glance
By Rachel Williamson
The OECD/G20 Inclusive Framework introduces a new way to tax excess profits, setting a global taxation floor.
Pillar One of what has been dubbed “BEPS 2” allows countries to tax profits from goods and services provided by multinational groups with more than €20 billion (A$31.6 billion) in global turnover and profitability above 10 per cent of revenue.
In return, countries that impose digital services taxes, such as those in France and the UK, must remove them, as well as any similar measures.
The move is expected to reallocate more than US$125 billion (A$173 billion) in profits from around 100 of the world’s largest and most profitable multinationals to governments worldwide. The arrangement is set to be reviewed in seven years.
Pillar Two sets a global minimum effective tax rate of 15 per cent for multinationals with a combined revenue of €750 million (A$ 1.1 billion) or higher.
A top-up tax will be imposed on in-scope multinational companies where their effective tax rate on a jurisdictional basis is below the Pillar Two tax rate.
Digital taxes begone
Australia’s comparatively high company tax rate of 30 per cent means a sub-15 per cent effective tax rate is less likely for Australian operations, but the trade-offs under Pillar One may require a re-assessment of other future measures originating from BEPS 1.0, says Michelle De Niese, executive director of the Corporate Tax Association.
"For Australia, we do have a number of unilateral measures that were introduced under BEPS 1.0,” says De Niese.
“Those include the Diverted Profits Tax and the Multinational Anti-Avoidance Law. The expanded focus of Pillar One on globalisation rather than just digitalisation may see such measures being re-assessed," she says.
De Niese says compliance is now the primary concern for Australian and other multinational companies, since Pillar Two has the potential to impose a significant cost of doing business overseas.
Pillar Two challenges
While low-tax jurisdictions such as Bermuda and the British Virgin Islands are the obvious target of the far-reaching Pillar Two, jurisdictions such as Malaysia, Singapore and Hong Kong can expect to feel some pain too.
Hong Kong, for example, has a headline corporate tax rate of 16.5 per cent, but a series of concessions means companies can get their effective tax rate down to 8 per cent.
"Income arising offshore is not subject to tax in Hong Kong, and capital gains on real estate sales are not subject to tax," says Anthony Lau FCPA, partner with M&A Tax Services Group at Deloitte China in Hong Kong.
"Such domestic tax treatments are different from those of Pillar Two. It means multinationals in Hong Kong may need to pay top-up tax under Pillar Two and may mean Hong Kong could lose its competitiveness."
Countries that position themselves as tax-friendly jurisdictions may need to change their pitch.
Lau says opportunities lie in having good regulatory infrastructure, as Hong Kong and Singapore do, an English-speaking workforce and strong capital markets. Proximity to customers or suppliers is also a boon.
Hong Kong, for example, already has a relatively simple tax system, but the government could boost the territory's competitiveness by further minimising the compliance burden of Pillar Two on in-scope multinationals, Lau says.
"The Hong Kong government can use the additional revenue from Pillar Two to return economic benefits back to these companies as well. It could consider reduced salaries tax or stamp duty, because neither is in-scope of BEPS 2.
“We suggest the government consider improving the competitiveness of our tax system by implementing group loss relief.”
Other measures include continued focus on attracting overseas talent, all enhancing financial infrastructure that brings in investors and branch offices, and focusing on innovation and technology.
Optimism for the future
The new BEPS pillars eliminate the need for each jurisdiction to impose its own digital taxes and incentives that account for tax paid (or not paid) in another country and charge its own tax to make up for inadequacies, perceived or real.
"You would have an international tax system which would be near-impossible to comply with," de Niese says.
"With BEPS 2, we can hopefully avoid trade wars and other negative outcomes that would emerge from a very complex mishmash of different practices that attempt to paper over some of the problems associated with the current system.
"There was a recognition during the negotiations that the current system cannot move forward without change. I think there is a lot of will and interest across the Inclusive Framework in making the proposed changes work."