Support for 15% global tax accord may become casualty of war

The concept of location is fundamental to taxation and in an era of globalisation, outmoded ideas of what location means are tripping up the tax system

Sun, 17 Apr, 2022 - 14:12

Brian Keegan

The data collected from this month’s census is based on where people were located on census evening.

The ages-old idea of holding a census was originally not out of sociological curiosity, nor out of a desire to better target national infrastructure and services, but to see where to raise taxes.

The concept of location is fundamental to taxation and in an era of globalisation, outmoded ideas of what location means are tripping up the tax system.

The UK Chancellor of the Exchequer, Rishi Sunak, found himself having to deal with one of these outmoded ideas earlier in the month.

In the UK, and in this country but to a lesser extent, some taxes are based on an old-fashioned legal concept called domicile.

Domicile has little to do with where you are currently located.

Rather it is a more nebulous concept involving matters as obscure as where you want to be buried when you die.

Even though the chancellor’s wife seems to have been resident in the UK, her Indian domicile was reported as exempting her from British tax on some of her offshore income.

A similarly outdated notion of residence applies to companies.

Unlike individuals, companies don’t have a domicile.

Instead, a key factor for deciding where they are taxed is where board meetings are held, rather than where they have their factories or warehouses.

This is one of the anomalies which recent efforts towards a minimum effective corporation tax rate of 15% worldwide, along with insisting that some tax is paid where the company sells products and services, seek to fix.

These proposed new arrangements for larger companies are running into trouble, and for reasons that have nothing to do with corporate lobbying.

Any tax which is based on market location can only work if the countries involved are willing to share information among themselves about the tax status and operations of companies in their jurisdictions.

Many countries already have treaties or information exchange agreements in place to allow this to happen.

Current tax proposals for taxing multinationals rely on existing agreements remaining in place or being extended, along with new agreements being formed.

The world has changed utterly since this new tax approach was brokered. Some countries have already suspended existing arrangements for information sharing with Russia.

Furthermore, several of the countries with the largest markets, which stood to gain the most from the new international regime, have not been forthright in condemning the Russian invasion of Ukraine.

These countries include China and India. Will any economy in the western world willingly share its corporation tax take with these big markets, not just immediately but in the foreseeable future?

It seems that the international appetite for sharing either information or tax receipts might be waning.

This growing reluctance is also influencing the adoption of a 15% minimum effective rate rule.

Last week Poland, in the context of EU attempts to make the 15% rule an element of EU law, pointed out that the 15% rate approach and the market share approach were two pillars of one overall strategy and that you can’t have one without the other.

There is some merit to this argument.

When it comes to tax matters within the EU, unanimity among member countries is still required so Polish opposition is enough to halt the EU’s tax efforts, at least for the time being.

There have been many casualties in the brutal and unnecessary Ukraine war.

Strangely, last year’s hard-won consensus on international corporation tax might be one of them.