CIOT and IFS debate: What next for international tax co-operation?

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THE PANEL

Chenai Mukumba - Executive Director, Tax Justice Network Africa

Paul Oosterhuis - Senior International Tax Practitioner, Skadden, Arps, Slate, Meagher & Flom, Washington DC 

Tim Power - Director for Business and International Tax, HM Treasury, and Chair, OECD Committee on Fiscal Affairs 

Tim Sarson - Head of Tax Policy, KPMG UK

Chair: Helen Miller, incoming Director of the Institute for Fiscal Studies

THE DEBATE

Is international tax cooperation now in retreat? That was the question that hung over the latest CIOT-IFS tax debate, which took place online on 16 June, with contributors joining from three continents for a discussion chaired by incoming IFS director Helen Miller.

Topics covered in the debate included whether ‘Pillar Two’, the global minimum corporate tax rate, can operate alongside US tax rules, without applying to the US, and whether retaliatory measures in the current US tax bill are likely to be implemented in their current form. The debate also explored the role of African countries in driving the UN tax process and whether there is any prospect of an agreement on reallocation of taxing rights which the US could sign up to.

The session opened with CIOT President Nichola Ross Martin welcoming attendees. She took the opportunity to thank Paul Johnson, who has been very much involved in this series of debates over the 12 years they have been running, but who is stepping down as IFS Director in the next few weeks. She welcomed his successor Helen Miller, before handing over to her to chair the debate.

Tim Sarson – dream of a global set of rules has gone, but regional and bilateral deals will continue

Tim Sarson spoke first, beginning with a recap of why international tax cooperation is important. He identified three reasons: to help governments prevent international taxpayers playing fast and loose with the rules, making use of arbitrage to pay less tax than they should; to prevent businesses and individuals from being taxed on the same profits twice in different countries; and (perhaps surprisingly) to reduce bureaucracy and make paying tax simpler for multinational companies by giving them fewer sets of rules to deal with.

He suggested that the first work at the OECD on Base Erosion and Profit Shifting (BEPS) had been relatively easy to reach agreement on as it was mostly principles-based changes. Where changes went beyond principles, for example the definition of permanent establishment, they were optional. But now discussions have moved on to issues which are more fundamental in changing where tax gets paid with the reallocation of taxing rights (Pillar One) and a global minimum corporate tax rate (Pillar Two) agreement is proving harder to reach. One of the prime architects of the two pillar strategy – the United States – is out. China and India are among those who haven’t implemented Pillar Two.

He identified “active hostility” to elements of Pillar Two as well as to things like digital services taxes in the bill currently going through the US Senate, with a threat of “retaliatory action that really starts to bring things to a head”. It can feel a bit like the whole edifice is crumbling, he suggested. “If the US gets its way or ploughs through with something that looks like this section [section 899] then I think that does put a lot of the mid-sized economies of the world in quite a tricky position because they’re potentially sticking to what was supposed to be a global agreement that might put them at a little bit of a competitive disadvantage vis-a-vis big countries like China and the US.”

Mr Sarson suggested this was “probably the last hurrah” of big, global OECD-led initiatives for some time at least. This was not just because individual states are threatening this but also because certain blocks that were engine rooms for change at OECD level are starting to disintegrate. As an example he mentioned the increasing difficulty of getting unanimity on tax policy within the EU. He said his sense was that possibly where things would go next in international tax co-operation might be more focused on high-net-worth individuals – “the so called oligarchy, and good luck to any international institution that wants to police that in any way, that’s going to be pretty tricky”.

He also foresaw much more regional and bilateral tax co-operation going on, as has been seen in the area of trade with a move away from the World Trade Organisation (WTO) leading, towards regional arrangements like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and bilateral trade agreements. What does that mean for taxpayers? “The dream of having one single standard set of rules globally is pretty much gone but on the other hand I don’t think we’re going to be back to the wild west days of cross-border arbitrage, hybrid entities, hybrid structures, etc.” Life is going to get a bit more complicated for multinationals, he suggested. They will have to think about different countries in different regions in different ways, with the US becoming a bit of an outlier in how you manage taxation in the same way as countries like Brazil have been historically.

Paul Oosterhuis – US seeking ‘side by side’ cohabitation with Pillar Two

Paul Oosterhuis suggested the approach of the US government on these issues was being unfairly maligned. The Trump administration would not sign up to Pillar One, but he did not think it would have been signed up to by a Democratic administration either. Pillar Two was different. The Biden administration had come up with a Pillar Two-compliant proposal which would have raised significant revenues, but the business community had – unwisely in his view – persuaded the Senate that it was giving away sovereignty and not in US interests so it had not passed.

He said it had been unclear at first whether the approach of the Treasury department under the new government would be to do everything it could to ‘blow up’ Pillar Two (as many Republicans would wish) or just to say ‘we’re out but it’s okay if everybody else is in’. Meetings in South Africa in March showed it was the latter, with the US taking the view that the US system should be ‘side by side’ with Pillar Two, meaning the Undertaxed Profit Rule (UTPR) should not apply to either US companies or the controlled foreign companies (CFCs) of US companies, “but we were not going to say anything about UTPRs applying to other companies or about QDMTTs [Qualifying Domestic Minimum Top-Up Taxes] except that the Treasury department would want to change the administrative guidance to make it optional rather than mandatory that a QDMTT would come before CFC rules including GILTI [Global Intangible Low-Taxed Income] so that if a country wanted to they could allow a credit for GILTI or subpart F tax against their QDMTT.”

Mr Oosterhuis thought that was “a pretty reasonable position”. He thought the US Treasury right to call GILTI (which imposes a minimum tax rate of 10.5%, set to increase to 13.125% in 2026, on the foreign earnings of US multinationals) “a robust system”. He noted that the Joint Committee on Taxation – a non-partisan congressional committee – had calculated that conforming to Pillar Two today would be a tax cut overall for US companies. “So the word out there that US companies are going to be in a more favourable position [as a result of the US staying out of Pillar Two] is not true in the aggregate,” he explained.

He noted that the Senate Finance Committee is considering some changes to the GILTI system that could bring the US closer to Pillar Two rules. For example they are thinking of scrapping expense allocation and upping the GILTI rate to pay for it.

Meanwhile the House of Representatives has passed a tax bill (the ‘One Big Beautiful Bill’) containing retaliatory tax measures (section 899). This would automatically designate UTPRs, digital services taxes (DSTs) and diverted profits taxes as unfair foreign taxes. Mr Oosterhuis said that the US Treasury is talking with the Senate about two possibilities – delaying the measure for a year to allow more time to negotiate, and moving DSTs and diverted profits taxes from a mandatory to a discretionary category. He expects section 899 to be in the final bill and for that bill to be enacted by the beginning of August. He explained that if DSTs and diverted profits taxes are taken out and it only applies to UTPRs then the goal will be to get the Treasury’s ‘side-by-side’ arrangement in place before section 899 goes into effect so it need not ever be implemented (though it would remain on the books).

Chenai Mukumba – UN process is bumpy but while it continues there is hope

Chenai Mukumba focused her remarks on the tax discussions at the United Nations, explaining what had motivated them and what they aimed to achieve.

She said the conversation now gaining traction at the UN was in large part a response to feelings of non-engagement with the OECD process among developing countries, especially in Africa.  As far back as the 2000s questions were being raised by ministers of finance about ways in which the rules of the global tax system were being developed and implemented and the extent to which they included the voices of all affected. African Union ministers came together in 2020 at the beginning of the two pillar process and had a discussion which concluded that “developed countries are not listening to concerns of developing countries and have no intention of addressing the balance of taxing rights in any significant way”. This reflected their frustration at the way the two pillar process was unfolding. Following this, in 2022, a UN resolution was tabled by Nigeria on promotion of inclusive and effective tax cooperation. It argued for a platform that truly reflected the needs of all countries.

Ms Mukumba said that the UN process was still nascent. We only started seeing substantive technical conversations in August. Negotiations that have begun this year are expected to conclude in 2027. Member states are trying to negotiate what the UN framework convention on international tax cooperation will look like, she explained. As well as the framework convention there will also be protocols which speak to specific subject areas in depth. One is the taxation of income derived from provision of cross-border services in an increasingly digitalised and global economy. This is a direct response to the lack of a solution on OECD Pillar One.

“African countries, global south countries do still believe that there is an opportunity for collective decision-making to remain at the forefront of the way we agree some of these rules,” she asserted. Have the UN negotiations been going smoothly? Absolutely not, she acknowledged, noting that the US had walked out. But the negotiations had continued, demonstrating that decision-making does not depend on just a few countries for conversations to continue. Those such as the UK are still present, even after voting ‘no’ to some of the proposals, and the talks still have momentum, she maintained. So keep talking about the two pillars, but recognise that there is a parallel, inclusive discussion at the UN that could provide us with a way forward and result in decisions being made collectively. “There is still hope as far as I am concerned”, she concluded.

Tim Power – US retaliation measure is disproportionate

Tim Power began by emphasising that the principal focus of the UK government is trying to find a negotiated solution to the issues identified as being of concern. They are approaching these negotiations “pragmatically and constructively” but the issues are not straightforward, he explained. We know what the US administration’s position is on DSTs, but we are yet to understand whether there are alternatives (to scrapping DSTs) which might be acceptable to the US, either related to the allocation of taxing rights or reformulating DSTs in a way that overcomes concerns regarding discrimination.

On Pillar Two he said it was clearer what the US is asking for, but there are important policy questions, in particular whether switching off the UTPR to US groups’ foreign operations will create unacceptable issues from a level playing field standpoint, potentially reintroducing BEPS risks. He said it was inescapable that the GILTI “could allow groups to continue realising substantial profits in no or low tax jurisdictions which is clearly in tension with Pillar Two’s policy aims and could create risks in terms of the competitive position of groups headquartered in other countries.” The big question was, he suggested, “how material that concern is, how much would a ‘side by side’ system threaten the sustainability of the Pillar Two framework. I don’t think that’s an easy question.”

Mr Power suggested that the retaliation threatened by section 899 of the current US tax bill was disproportionate to the amount of tax raised by the measures it is retaliating against. “It’s obviously a new and very important ingredient into what was already a very challenging negotiation… I think the government has raised concerns about the principle of a measure that seeks to threaten retaliation against countries like the UK but those concerns are then amplified by the fact that the retaliation that is threatened would seem to be highly disproportionate in tax terms to the amount that’s actually being raised by the measures against which retaliation is being threatened.”

The UK has a number of specific concerns about the US legislation, he explained. These include that the current draft doesn’t allow enough time for solutions to be negotiated and then enacted; that the draft is prescriptive and doesn’t give the US Treasury much discretion; that it bundles together different tax issues; and that definitions of discriminatory and extraterritorial taxation in the bill are very broad, leaving the potential for this to become a repeatedly used tool. He said the UK is looking to progress negotiations with the aim of ensuring this is academic, but if the provision is enacted “we have to contemplate a scenario in which retaliation materialises”. The UK has been highlighting the “damaging impact this would have on UK-US trade”.

Mr Power was keen to emphasise that international tax cooperation and its benefits go much wider than these high profile areas of contention. In forums he is chairing, discussions continue on treaties, transfer pricing guidelines, use of AI in digitalisation, tax transparency and much else besides, with the US taking a very active and engaged position along with others. The two pillars are ambitious and should not be seen as the norm. Lots of benefits come from sharing of best practice and models that form the basis for bilateral negotiations. On areas like global mobility of people that is likely to be the output of that work given differences between countries.

Finally, on where international cooperation should take place, he said the reality is that there will continue to be multiple fora contributing, including both the UN Framework Convention and the OECD Inclusive Framework (whose term, he noted, has been extended for another five years). The UK is keen to ensure cooperation on tax issues involves both developed and developing countries. His hope is that the benefits of cooperation will continue to be recognised as the challenges that necessitate that cooperation are not about to fall away.

Questions and panel discussion

Is there still a big problem about allocation of taxing rights?

Yes, said Chenai Mukumba. Renegotiation of taxing rights is front and centre of the issues to be addressed.

Paul Oosterhuis saw an issue with treatment of cross-border services. The US is, he said, “very generous in our foreign tax credit including for withholding taxes on services. I am concerned about foreign countries expanding imposition of withholding taxes on cross-border services and the US Treasury suffering because it gives a credit for it.” That, he thought, should motivate the US administration to talk about cross-border services. He expressed sympathy with the desire of countries that are recipients of services to tax a portion of the income from those services, but to his mind it should not be done through withholding taxes.

Was there ever a world where the US would have signed up to Pillar One?

Not the US Congress, unless it raised substantial revenue, said Mr Oosterhuis, adding that the Biden administration had moved Pillar One discussion in a couple of directions which made it more difficult for Congress to sign up to it - in particular applying it to all industries not just consumer facing ones.

Helen Miller, from the chair, asked if it would be fair to say that the broad issue with reallocating taxing rights is that US multinationals have a lot of potential income to tax, other countries would like to tax that income, but any proposal that tries to reallocate money away from the US to other countries is going to have an issue in the US.

Mr Oosterhuis did not think that was the case. He reiterated that current US law “is very generous in foreign tax credits for cross-border taxes on services”. Congress thinks about both sovereignty and revenue, he suggested. “If there were a services/royalty package agreed to which actually raised revenue in the United States because of cutting back on the foreign tax credit that might be something Congress would be interested in.”

Have all the big problems been fixed?

Tim Sarson expanded upon an earlier comment he had made, saying that he wasn’t arguing that all the big issues in international tax have been fixed, only that they had all been tried and looked at. Cross-border reallocation, particularly in relation to the digital economy, had been tried in both BEPS processes but the reality is that it was struggling to happen even under all the best tailwinds internationally. However most multinationals would rather have globally agreed (or, next best, regionally agreed) rules than face increases in withholding taxes and different interpretations of what counts as a particular type of activity or payment. We already see a lot of double taxation, particularly of multinationals which operate in the global south where they will be treated in one way by the parent company jurisdiction, which will have one interpretation of what constitutes a royalty, for example, and another way in a local country. “It would be great if we could get consensus at any level,” he said, but it looks “very difficult, so I expect we’ll see more of a proliferation of different taxes in different countries.”

Tim Power explained that successive UK governments have said they think there are limitations with the current model treaty in how it applies to digital businesses. He does not think that that concern is going to go away. In respect of the US stance, he said it was interesting to consider the extent to which US thinking is dictated by how much taxing rights the US is surrendering as against how much additional tax US groups might be subject to, even if that is a result of taxing rights transferring between two non-US countries. He thought the Pillar One multilateral convention probably did as much as it could “to insulate the US from being a principal surrenderer of taxing rights, but inevitably if it’s not the US surrendering taxing rights it’s going to be other countries and I think the net effect would [still] have been additional taxation of US businesses and maybe that is a thing that has made this really difficult to land in the US.”

Mr Sarson saw a philosophical difference between how countries view taxing rights, with the US regarding taxing rights like they regard citizenship: “A US multinational and all of its profits, all of its activities wherever they are in the world – they are our guys… we are going to set the rules… Whereas a lot of the rest of the world… they consider it doesn’t matter where the company is headquartered, it’s what goes in in our territory, and if it goes on in our territory with our customer base or with our natural resources then that’s ours.”

Is section 899 more a negotiating tactic than a means to raise revenues directly? And what can the UK do about it?

Mr Oosterhuis elaborated on how section 899 would work, explaining that countries with taxes deemed discriminatory or extraterritorial would see their taxpayers who pay US tax (because they have US branches or investments, say) have their rates increased by 5% per year so long as the unfair tax remains in place. It would be effective from 1 January next year. It overrides tax treaties. It also expands the US’s BEAT (base erosion and anti-abuse tax) provisions to disallow deductions paid to entities of taxpayers in those countries. He described this as “pretty draconian”, offering the view that most members of Congress would say privately (and some have said publicly) that it is designed to change laws in other countries and they hope it never goes into effect. If it is delayed to give more time for negotiations and its scope is reduced that would take a lot of the pressure off, he suggested.

Mr Sarson said he has seen modelling by quite a few UK groups of what the impact of section 899 would be and it is significant: “For a services dominated economy like ours this is the biggest show in town at the moment.” But, he explained, the reason it is such a headache is because our businesses have such massive exposure to the US market. There are other countries out there which have similarly punitive tax regimes, but we are less exposed to them.

If the UN process concludes as expected in 2027, won't we have three international tax paradigms: OECD/EU, US, and UN? Does that help or hinder co-operation?

Ms Mukumba challenged the narrative that it’s UN versus OECD. “If you listen carefully, particularly to the reflections of African negotiators… they don’t see the UN process in conflict with what’s taking place at the OECD or ATAF (African Tax Administration Forum) or any other institution… They see it as a platform to try to consolidate all these different conversations so that there’s an overarching body, a UN body, that’s able to oversee these discussions”. She observed that the Africa group had not got all its own way at the UN – the second protocol being negotiated is on dispute resolution and prevention when the Africa group wanted it to be illicit financial flows. She welcomed that the agenda was being set by a range of countries.

Mr Power observed that there are different model treaties out there and different organisations with different specialisms and focuses. These interact. Global mobility is a big agenda item within the OECD Inclusive Framework. It may well lead to possible solutions and models that countries might adopt in bilateral treaties, but it might feed into the UN process too.

Pillar 2 – what is the best case scenario for the global minimum tax going forward?

Mr Oosterhuis emphasised that from a US point-of-view ‘side by side’ is the way to go (see his earlier comments). He said he was hopeful of persuading the UK and others that situations where US multinationals will benefit from being subject to GILTI compared to Pillar Two is not substantial. “There can be peaceful coexistence between the United States and Pillar Two compliance,” he concluded.

Ms Mukumba said that even with Pillar Two, African countries had raised a number of concerns during negotiations, including whether rates were high enough and around exclusions.

Mr Power said the UK’s aim was: “A negotiated solution that responds to US concerns but also preserves Pillar Two’s policy aims and doesn’t create undue level playing field risks. I think Paul’s assessment is that a side by side system can deliver that. I think there are some other countries that at least have questions as to the materiality of the risks that would get opened up under that and that I think is where the discussions can be focused.”

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