New framework a big step forward in international tax reform

Opinion Piece

Date : 03 July 2021

Author: The Hon Josh Frydenberg MP

More than 130 countries moved a step closer to a historic agreement to change the international tax system overnight.

The Organisation for Economic Cooperation and Development/Group of 20 are addressing the challenges of digitalisation and globalisation with an inclusive framework designed to bring fairness and certainty to the way multinationals are taxed.

It is based on a two-pillar framework that will go for endorsement to G20 finance ministers later this month.

Pillar one seeks greater taxing rights in the jurisdiction where the consumer, rather than the producer, is located. It is expected to cover 100 of the most profitable and largest multinational companies with annual revenue of more than €20 billion ($31.7 billion).

This would include digital service providers such as Google and Facebook, and consumer facing businesses such as Johnson & Johnson. It applies to businesses that may have substantial sales in certain jurisdictions but little physical presence.

This reform was advocated strongly by the UK, along with France and Italy and others in the European Union who had taken matters into their own hands by imposing unilateral digital taxes.

The multilateral approach will replace the country-by-country approach to digital taxes in place in more than 25 countries.

The imposition of unilateral taxes saw retaliatory tariffs from the US which, in turn, created uncertainty and friction in the global trading system as well as a higher consumer burden as multinationals passed on the added costs.

Significantly for Australia and other resource-intensive countries such as Indonesia and Canada, extractive industries are exempt from pillar one. So, too, are regulated financial services.

Pillar two establishes a global minimum tax of at least 15 per cent on multinationals with annual revenue greater than €750 million. This reform builds on earlier work by the OECD/G20 on base erosion and profit shifting (BEPS) and was given momentum by the United States.

It is designed to prevent a so-called ‘‘race to the bottom” in which some jurisdictions impose a headline company tax rate of well below 15 per cent which can see an effective rate of tax of close to zero The reform will enable jurisdictions such as the US to impose a ‘‘top-up” levy on companies that may be headquartered in the US but generating income abroad.

The changes will help to reduce corporate tax arbitrage and profit shifting. The OECD estimates that the combination of pillar one and pillar two changes could generate an additional €50 billion to €80 billion a year in global tax revenue.

But, most importantly, these reforms have been designed in a way to encourage trade and investment and the efficient allocation of resources.

As they stand, these tax reforms do not undermine Australia’s existing tax base but instead open up an opportunity to secure a new tax base in the increasingly digitalised and globalised world.

As with the previous BEPS agenda which was advanced when Australia hosted the G20 in 2015, our nation has played a leading role in championing these reforms. We were the vice chair of the steering group working on the G20/OECD framework on behalf of 139 countries.

These latest reforms build on earlier initiatives in the multinational tax space that the Coalition has implemented since 2016 including the multinational tax avoidance law (MAAL), to counter artificial arrangements that avoid a taxable presence in Australia; the Diverted Profits Tax (DPT) which puts a 40 per cent rate on profits diverted offshore through contrived related party transactions; a doubling of penalties for multinationals that seek to avoid tax; stronger thin capitalisation laws and the establishment of the tax avoidance taskforce. Together these measures have raised more than $20 billion in tax liabilities.

These are part of a broader Australian approach to the new economy, including the extension of goods and services tax to imported digital products in 2017 and to offshore sellers of hotel bookings in 2018. Legislated digital platform reforms will see the digital giants pay traditional news media businesses for generating original content. A world first reform.

Tax, let alone international tax is one of the more anodyne and complex areas of international economic policy. But it is vitally important that the system works efficiently, equitably and sustainably and is implemented in a way that encourages trade, investment and innovation.

These changes not only adhere to these foundation principles, but enable the global tax architecture to be fit for purpose in a rapidly-changing world. At the upcoming G20 Finance Ministers’ meeting, Australia looks forward to supporting these reforms that simultaneously advance the national and global interest.

Josh Frydenberg is the Federal Treasurer

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