The G-20’s global crackdown could create a new kind of tax haven

LONDON — A landmark deal to close cross-border tax loopholes is ultimately likely to fail to remove the incentive for some of the world’s largest companies to shift their profits abroad, experts have told CNBC, describing the proposed reform as “shockingly” unfair for low income countries.

It comes shortly after G-20 finance ministers backed a plan to ensure multinational companies pay their fair share of tax wherever they operate. The pact, championed by The Organisation for Economic Cooperation and Development, is expected to put in place a minimum global corporate tax rate of 15%.

It is intended to reform the global tax system to make it fit for the digital age and is likely to impact companies such as Amazon, Google and Nike, among many others. The aim is for world leaders to finalize the deal at an October summit in Rome.

French Finance Minister Bruno Le Maire has described the deal as a “once-in-a-century tax revolution,” saying: “There is no turning back.” U.S. Treasury Secretary Janet Yellen said backing from the world’s top finance officials showed “multilateral collaboration can be successful.”

So far, 132 countries have signed up to the OECD’s “Inclusive Framework,” although several countries are known to harbor serious reservations over the terms of the deal.

Alex Cobham, chief executive of the Tax Justice Network, an advocacy group, has described discussion and agreement on the OECD’s global corporate minimum tax as “historic,” but one that fails to deliver fair and effective reform.

He has warned the deal in prospect would, “shockingly,” give the lion’s share of revenue to the largest OECD members at a time when lower income countries already lose the greatest share of tax revenue to corporate tax abuse.

When asked what the OECD’s proposal was likely to mean for the future of tax havens, Cobham told CNBC via telephone: “The corporate tax haven element will be near an end.”

“There will still be some incentive to shift because if you pay 25% in country X then 15% is still better, but the way that headquarters countries are capturing the revenues under this proposal means that you would shift your profits effectively into the U.S. or France rather than waste your time — and money — shifting them into Ireland or Bermuda on the way,” he continued.

“So, it really will be a dramatic shift in terms of the business model of the corporate tax havens. It won’t be the absolute end but the more tightly the deal is defined, the more comprehensively that business model will be finished.”

Profit shifting is a practice used by some multinational companies to pay less tax than they should. Corporations do this by moving the profit they make in major markets such as the U.K., where they manufacture products or sell goods or services, into low-tax countries like Ireland and jurisdictions in the Caribbean. This profit is then taxed at a very low rate — or possibly not at all — depending on the rate of corporate tax in that country or jurisdiction.

Economists estimate that countries are missing out on a total of over $427 billion in tax every year as a result of international corporate tax avoidance and private tax evasion.

To fix this long-running problem, the OECD has proposed a two-pillar solution. Pillar one is aimed at the world’s top 100 companies, with global annual revenue above $20 billion. The levy will apply to companies’ profit margins of over 10%.

Experts and economists are concerned that this pillar only applies to a small part of the profits of relatively few companies and most countries, particularly low income nations, would be unlikely to recoup the revenue they may lose from existing digital service taxes.

One of the conditions of pillar one is countries would only gain access to the new distribution of taxing rights by removing all existing unilateral taxes on tech companies. Some countries are reluctant to do so because digital services taxes may cover a bigger number of companies than the current pillar one deal. In some cases, countries could collect more revenue from digital services taxes than the OECD’s proposal.

The second part of the OECD’s proposal, pillar two, is the global minimum corporate tax rate of 15%. This is thought to be of much greater importance than pillar one, and could raise as much as $275 billion of additional revenues if applied worldwide.

Alongside the Independent Commission for the Reform of International Corporate Taxation, several countries have criticized pillar two for its lack of ambition, however.

Kate Barton, global vice chair for tax at EY, told CNBC’s “Street Signs Europe” earlier this month that the OECD’s proposal for a global minimum corporate tax rate marked a “big step forward” but a lot of debate was still to come.

“What is really interesting here is the timeline,” Barton said, referring to the OECD’s goal to finalize the terms of the agreement in October and implement a global minimum corporate tax rate in 2023. “I find that really lofty,” she added.

When asked what the proposal was likely to mean for the future of tax havens, Barton replied: “I think that a lot of countries will reconsider their tax code and move up to that as a standard, so it is really a race to the middle.”

“There will still be some aspect of ‘what does the tax code in this country look like?’ but this definitely evens up the game,” Barton said.

Christian Hallum, tax policy lead at Oxfam, told CNBC via telephone that the OECD’s two-pillar framework for international taxation risks “exacerbating existing inequalities” in an already extremely unequal system.

He also warned the deal in prospect risks normalizing rates of taxation previously associated with tax havens such as Ireland and Singapore.

“There are still some moving parts and some things we do not know about the deal but from what we know, and I would call it an educated guess, the deal will to some degree be bad news for the classic 0% income tax havens such as Bermuda and the Cayman Islands, etcetera,” Hallum said.

“Having said that, we have a number of other types of tax havens. We have Ireland, Luxembourg and the Netherlands. Other places that are of a different nature, and what we’re seeing as a potential effect is what we like to call the ‘tax haven reshuffle.'”

In practice, Hallum said that, in its current form, the OECD’s framework would see a crackdown on one type of tax haven coincide with increased activity toward other types of tax havens.

“I think what is important to understand on the minimum tax is that it is not a blanket 15% corporate tax that will apply everywhere, it does have exceptions,” Hallum said, noting this was likely to mean many companies would be able to pay “far below the already far-too-low 15%.”

The so-called “substance carve out” in the OECD agreement allows companies to pay a lower rate than 15% in countries where they have many employees or tangible assets such as factories and machinery.

“This of course is an invitation in our mind to new forms of tax planning and will allow tax competition to continue far below 15% … The basic incentive for shifting profits has not been erased by a 15% floor on corporate income tax,” Hallum said.