With the UK’s place and influence in the world being much debated, it’s been easy to overlook one of the most significant international tax achievements of recent decades and the leading role the UK played in it.
Last month, at the OECD’s Paris chateau, 68 ministers, ambassadors and senior officials signed a multilateral convention to modify 1,100 bilateral double tax treaties.
It was the result of the G20 and OECD’s Base Erosion and Profit Shifting (Beps) project, which was kicked off in 2012 by former chancellor George Osborne and German finance minister Wolfgang Schaeuble.
Initially, it was seen as a project to bolster corporate tax revenues of major economies by changing international corporate tax, but it has morphed into a global project, adopted so far by almost 101 countries.
So why does it matter?
These reforms put the global tax system on a sustainable footing. They establish the core principle in 101 countries that corporate profits should be allocated to, and taxed in, countries based on the value generated there by the key employees of the multinational.
In the past, legal agreements could allow profits to be earned in locations with few, if any, people.
Second, it addresses so-called “treaty abuse” with regards to withholding tax. Withholding tax is a deduction on a gross payment of interest or dividends to an investor, common in developing countries. In the past, investors in developing countries have got around this fee by interposing a company in a corporate structure in a third country which has a treaty agreement to lower or remove withholding tax.
This loophole will come to an end once the multilateral convention takes effect, in 2018 and 2019. The treaty benefits of low or zero withholding taxes will be granted only when envisaged by the treaty countries. This will, for example, benefit developing countries which often rely on these withholding taxes as part of their tax revenues.
Third, it sets broad limits on tax deductions for finance costs, recognising that sometimes debt can be used more to deliver tax savings than bring finance to commercial operations. This last rule is a blunt instrument and is likely to catch some commercial activities with high debt levels, but has been chosen by governments as the easiest approach to apply across a broad range of businesses.
Finally, the convention introduces new approaches to dispute resolution, where countries cannot agree which state is entitled to tax the profits, underpinned by binding arbitration. New global tax reporting rules, where multinationals must hand over to tax authorities details of sales, profits, employees and taxes by country, will help tax authorities understand risks and target their tax audits.
The UK has played a key part in delivering these tax reforms. One of our leading Treasury officials chaired the group that negotiated the multilateral convention.
Some of the Beps measures are based on existing British concepts. The UK is implementing measures quickly – perhaps too quickly for some – and has worked with EU partners to implement measures across Europe from 2019.
The UK is also the leading global provider of aid to help developing countries build more effective tax administrations, so they can benefit from the reforms.
Considering its scale, the Beps project has been devised and implemented incredibly rapidly. There are some rough edges, needing further work, but within a couple of years we should see global corporate taxation put on a sustainable basis.