William John Market Report 01-07-21
William John comments on the progress of the G7’s “Global Tax Plan” at the OECD talks held in Paris this week.
Taxation, Globalisation, Banking, William John, G7, G20, economic development, william john holdings ltd, william john capital bonds

William John Market Report 01-07-21

William John Market Report 01-07-21

Category: Reports

The G7’s “Global Tax Plan” being overseen by the Office for Economic Co-operation and Development (OECD) for the G20 has come under intense scrutiny this week. 

The OECD/G20 Inclusive Framework on BEPS (Base Erosion Profit Shifting) was established in 2016, with the aim of addressing base erosion and profit shifting that has occurred with the digitalisation of the World Economy. Base erosion and profit shifting, a collective strategy of multinational enterprises exploiting gaps and mismatches between different countries’ tax systems, is expected to cost countries between 100-240 billion USD in lost tax revenue per year, according to the OECD. Furthermore, the OECD argues it disproportionately affects developing countries who rely on corporation tax as opposed to income tax. This is due to the fact that a large proportion of the demographic in developing economies represents an ‘informal’ economy and do not report their income. 

As a result of this observation, since 2016 over 139 countries and jurisdictions have signed up to the initiatives, which have been split into two pillars of discussion. ‘Pillar One’ focuses on nexus (tax jurisdiction) and profit allocation, whilst ‘Pillar Two’ focuses on establishing a minimum global tax regime for multinational groups. ‘Pillar One’ seeks to evolve tax rules to ensure “that, in an increasingly digital age, the allocation of taxing rights with respect to business profits is no longer exclusively cut off by reference to physical presence”. ‘Pillar Two’ seeks to ensure that profit shifting to jurisdictions where they are subject to no or very low taxation no longer occurs. 

As this Global Tax Plan develops, however, many prominent participants have voiced their concerns about the plan. The United States, whose domicile includes that of Amazon, Facebook, Alphabet and Microsoft have been targeted by domestic digital tax statutes in recent years, such as the U.K.’s Digital Services Tax introduced in April 2020. It was no surprise to see the United States ask for amendments to these bills targeting these companies, with the four companies making up the top five most valuable companies by capitalisation in the world:

As Pillar One provides for a globalised approach to targeting these firms on nexus and profit allocation, the U.S. has asked for these domestic tax arrangements to be dismantled in return for an agreement on Pillar One in countries including the U.K., France, and Italy amongst others. 

At meetings held in Paris this week, an agreement between the OECD nations has been reached with the consensus view that dismantling domestic tax regimes in return for the implementation of Pillar One must be “carefully choreographed” to ensure a smooth transition from one system to another, without a significant loss of tax revenues. 

Additionally, it is expected that the U.K. will secure an exemption for the City of London on the global tax plan. The Chancellor of the Exchequer Rishi Sunak has pushed for the exemption to ensure that the institutions involved do not pay more tax in other countries relative to the Treasury. This is based on the rationale that firms that operate in financial services must have appropriately capitalised entities in each jurisdiction and therefore pay the right level of local tax anyway. 

As the world’s richest countries haggle over ‘special status’ for their trophy assets, commentators will pay close attention to the further development of the Inclusive Framework and how effective it will be, with the most valuable contributors to this global tax plan including the world’s largest companies and banks already exempt from the proposals. 

Any opinions expressed in these documents are those of William John and are provided for information only. E&OE.