Thread by @TimSarson1

With global tax reform in the news, and what with me being an international tax adviser, the day job is finally fleetingly relevant. So here's a thread.
This weekend's announcement may seem new but it's been a long time in gestation. 1/24

Whilst it's certainly radical it is some way off implementation and will eventually just become an accepted norm and boring compliance requirement. So what is this global reform the G7 leaders agreed this weekend and why have they done it?
Though it may have seemed to come 2/24

from nowhere with Janet Yellen's 21% global min tax proposal, this is not "Biden's tax plan". It's the less catchy Pillars 1 and 2 of the OECD's BEPS 2.0 programme, which was first consulted on in March 2019. BEPS 2.0 implies there was a BEPS 1. So there was, and to 3/24

understand how we got here we must go back a bit further. BEPS stands for "Base Erosion and Profit Shifting". It encapsulates the 2 bad things gov'ts and civil society have been accusing MNCs of doing with corporation tax for years. 4/24

CT makes up a small fraction of govt tax take in some cases as low as 5% (in the UK last year it was c.50bn out of 828bn). More in the US because they don't have VAT so they increase CT to compensate. But it exercises people disproportionately. 5/24

Arguable whether we should tax corporations at all given they are simply a conduit for wealth creation, like partnerships (which we don't tax). Why not just tax the shareholders? Many reasons - some shareholders are exempt for example. But also it's 6/24

easyish to tax them. Corporations don't vote but they do operate in countries and make visible money.
Anyway back to BEPS. "Base Erosion" means using various means to create deductions against tax in a country. i.e. eroding the tax base. That might include 7/24

interest payments on debt, or costs that are deducted on one end of a transaction but the income not taxed on the other. Or income simply slipping through and being taxes nowhere. "Profit shifting" means what it says. Businesses structuring themselves and their supply chains 8/24

in a way that concentrates profit in low or zero tax locations, through that nefarious dark art known as Transfer Pricing (which is what I do for a living and isn't nearly as nefarious as you think). 9/24

BEPS 1 was triggered by scrutiny on MNCs after the financial crisis in an atmosphere of something must be doneism. Its 15 actions tackled base erosion pretty effectively but they struggled to keep everyone happy when it came to profit shifting. Because when you move profits 10/24

you have a winner and a loser. Or rather multiple losers who all feel entitled to the same slice of the cake. BEPS 1 reinforced the importance of allocating profit to real business activity. Brass plate companies and board meetings wouldn't cut it. It was principles based, 11/24

and logical, but still allowed companies to put profit where their decision makers and innovators sit, rather than their customers. You see corporate tax is a tax on profits, but many people would like it to be a tax on sales. Which would make it a VAT, or sales tax. 12/24

Hence BEPS 2.0 which, behind the rhetoric, is is really an intra-rich world shuffling of the deck. It takes from small wealthy trading nations and entrepots and gives to large equally wealthy consumer markets. The biggest winners are likely the USA and a few 13/24

European countries (Japan, Korea, China I expect will see little real impact). It does so through 2 "pillars". Pillar 1 you'll have seen described as taking 20% of profits over a 10% margin threshold and redistributing to market territories. That's right, but underneath 14/24

is a mass of complexity. Several stages of calculation, numerators and denominators, and still a number of judgment calls. Meaning countries will continue to be able to fight over their share. Meaning plenty to keep companies and advisers occupied. 15/24

The G7 agreements refines the scope a bit so many will be outside pillar 1, though the mooted "only 100 biggest global companies" seems unlikely. I bet many more will at least have to do the maths. The details will come later (assuming G20 agreement in July) 16/24

Pillar 2 is more interesting. The global minimum tax now agreed at 15% (more on the rate below). This means any profits in a country subject to less than 15% tax can be taxed elsewhere. Either at the parent company jurisdiction - where the group is listed or owned 17/24

or, if they neglect to collect it (e.g. your parent company is in a haven) then it's collected on payments from other countries to the low tax location. Quite difficult to escape.
I'm not surprised 15% was agreed. It is the goldilocks rate. 21% as mooted by the US would 18/24

catch many "normal" countries that happen to have rates in the high teens but don't use tax as a tool of fiscal competition, like much of Eastern Europe. It would reward the US, essentially, for not having a VAT. 10% or lower and you only catch the true havens but not the 19/24

"SIS" - Singapore, Ireland and Switzerland - which get so many other countries worked up with effective rates in the 10-13% range. 15% hurts them a bit, but not devastatingly, but keeps the next tier of countries with patent box and R&D incentives safe. Those include 20/24

UK, Spain, Belgium, Netherlands, even France and Italy. They can live with a 15% global rate and still incentivise R&D investment. So 15% it is.
What will all this do to corporate behaviour? It will certainly deter them from using havens but these were vanishing anyway. 21/24

It will encourage a race to the middle among countries I expect. Why tax at 10% when you might as well tax at 15%. But why not drop to 15% if you can afford to?
It will also move us from principles based taxation to safe harbour taxation. And prescriptive rules encourage 22/24

circumvention and avoidance by those determined to do so. Will we see more of that? Remains to be seen. It may encourage more blunt instruments in tax policy. I blogged about these a few months ago linkedin.com/pulse/blunt-in… 23/24

Ultimately it will just be one more set of rules and processes to comply with. Companies will adapt (most probably won't be affected financially by pillars 1 and 2 anyway) and just build the extra admin into their compliance cycles. 24/24

Here are the most recent OECD proposals if you want to know more about the detailed mechanics for pillar 1 oecd-ilibrary.org/sites/beba0634…
or Pillar 2
oecd-ilibrary.org/sites/abb4c3d1…

Probably should have done a few hashtags. So let's be having you #globaltax #TaxTwitter #G7UK #globalminimumtax