Corporate Tax

Allan Lanthier: The OECD says goodbye to corporate tax avoidance? We are going to see

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The OECD estimates that the new tax should initially generate Canada’s tax revenue of $ 2-3 billion per year

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Allan Lanthier, Financial Mail Special Under the new minimum corporate tax rules, Canadian companies with foreign subsidiaries could no longer avoid taxing offshore income. Under the new minimum corporate tax rules, Canadian companies with foreign subsidiaries could no longer avoid taxing offshore income. Photo by Brent Lewin / Bloomberg

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Last week, as part of a major overhaul of international tax rules that have been in place for more than a century, the OECD announced an agreement on two new global tax measures: a 15 percent minimum corporate tax and a new regime for distributing the global profits of tech giants. Both should start in 2023.

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The agreement was signed by 136 countries that represent more than 90 percent of global GDP. The OECD has been tinkering with anti-circumvention measures for years, but this agreement plays in a different league: Corporations around the world would expect additional taxes of around 180 billion US dollars a year if the measures take effect.

Most of the attention is focused on the first measure, the corporate minimum tax. It would apply to multinational corporations with gross annual sales of at least € 750 million, or around $ 1 billion. There are around 300 such companies in Canada. According to estimates by the OECD, the new tax should initially bring Canadian tax revenues of 2-3 billion US dollars per year.

Under these rules, Canadian companies with foreign subsidiaries could no longer avoid taxing offshore income. The Canadian parent company would owe Ottawa 15 percent of the subsidiaries’ annual profits, minus any foreign taxes that the subsidiaries may have paid. Why 15 percent? No real rationale other than the rate that 136 countries were able to agree on.

Canada’s general corporate tax rate for large companies is around 26.5 percent, so the new tax won’t eliminate global tax avoidance. But it will ensure that overseas income is taxed at a combined Canadian and overseas tax rate of at least 15 percent, which is likely to send many international tax planners into early retirement.

Proponents of the tax say it is necessary to end the “race to the bottom” in corporate tax rates: low rates that encourage large multinational corporations to hide profits in low-tax countries and move business and jobs overseas. While there may be some truth in that, the main driver of the tax is clearly the massive new revenue it will bring to governments in a tight spot.

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The elephant in the room is the United States Congress and Republican Senators in particular. Treasury Secretary Janet Yellen campaigned for the initiative. But will Congress approve? The US is the only country that already has a global minimum tax, which was introduced under the Trump administration and at the same time lowered the US corporate tax rate from 35 to 21 percent. The tax will be applied at a rate of 10.5 percent to the so-called “global intangible low-taxed income” (GILTI) and will be the US proxy for the OECD tax.

The Biden government wants to increase the GILTI rate and expand its scope. However, there is no guarantee that Congress will approve. If not, many countries may think twice about imposing a 15 percent levy on their own multinationals. Should other countries delay the implementation of the OECD tax because of US inaction, it could well be that Canada will have to forego the tax for the time being, although Treasury Secretary Chrystia Freeland has made it clear that she wants to continue.

The second measure, agreed last week, is to allocate some of the taxable profits of global tech giants like Amazon and Facebook to the countries where their products or services are sold, even if they don’t have a physical presence in those countries. These new rules would only apply to the largest corporations in the world: those with an annual turnover of over 20 billion euros. Here, too, there is no certainty that the US Congress will agree: after all, US multinationals are the primary target of this measure.

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While many details remain to be worked out, the OECD agreement requires countries that have introduced a digital services tax (DST) to lift these taxes once this second measure is completed and states that no new DSTs will be introduced at this point should be introduced. The 2021 budget confirmed the government’s intention to introduce a DST of three percent from January 1, 2022. In a statement late Friday, the Treasury Department said the government would only continue the tax if a global deal fails to go into effect.

High taxes can hinder job creation and economic growth, and I leave it to economists to discuss the merits of the OECD initiative. As for me, I pulled out of the tax planning game a few years ago when global tax avoidance was at its heyday. My timing couldn’t have been better.

Allan Lanthier is a retired partner in an international accounting firm and has served as an advisor to both the Treasury Department and the Canada Revenue Agency.

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