CTA Address 2023 - The future of international tax reform

The Address

In his speech, Saint-Amans stressed the importance of getting United States backing for tax reform, saying that “you can’t move without them on tax matters”. This put him at odds with one of the respondents, tax justice campaigner Tove Maria Ryding, who argued that “an alliance of progressive countries across the north [developed world] and south [developing world] could move forward as the US will always be a very tricky country”.

Saint-Amans and Ryding were joined by veteran tax professional Heather Self for the event, held at the RSA in central London on 8 June. The event was chaired by Gary Ashford, President of CIOT, who began the event by welcoming the audience and introducing the speaker. He encouraged those in attendance to support the tax advice charities.

Pascal Saint-Amans opened his remarks by noting that history is important for understanding where we are in the future of international tax reform. “Countries are sovereign from a tax perspective, and the international community is made of sovereign states” he said. He suggested that there is really no such thing as international taxation - international agreements depend on the goodwill of sovereign countries.

Saint-Amans explained that because of globalisation and the fading of borders, the system has become outdated. International tax is now ‘extremely political’, due to the global financial crisis, which acted as a wake up call for governments who realised that they need lots of money to fix the issue.

Talking about ‘tax havens’, Saint-Amans argued that they are the results of “outdated tax policy or lack of international tax policy”. The use of tax havens is symptomatic of a world where globalisation is translating into massive leakage of revenue to taxation, and it needs to be fixed in order to make people feel like the system is fair, he said.

Reflecting on the OECD/G20 Base Erosion and Profit Shifting (BEPS) project, Saint-Amans thought that BEPS has had successes and failures. He considered “interconnecting the tax sovereignties” (for example, dealing with hybrid mismatches) as the key success of the project. Failures included a lack of agreement on how to address the tax challenges of the digitalisation of the economy, and a failure to reform transfer pricing rules.

Saint-Amans said that the United States under the Trump presidency “fixed tax reform” – cutting the rate and using BEPS to broaden the base. He stressed that the only way to fight avoidance is to tax profits where the market is located, in other words destination-based cash flow. This idea trigged the two pillar solution, he noted.

Turning to the two pillars, Saint-Amans said that while conversation about reallocation of taxing rights (Pillar One) had been “about digital, about personal contributions to digital models and consumer facing business as a proxy to marketing intangible” the Biden administration had sought to simplify that, putting segmentation aside for a ‘rough justice’ 20 billion euros of revenue, 10 per cent profitability, whatever business you are.

On Pillar Two, he said it ‘is happening’. Moreover, not all the countries in the world need to implement Pillar Two since if we have a critical mass of countries where companies are incorporated and which are market economies large enough, then all the companies in the world will be taxed due to the ‘income inclusion rule’ and the ‘under-taxed payments rule’ backstop.

Saint-Amans declared that resolving Pillar One is hard as it requires domestic legislation, and countries have doubts that the United States will ever able to implement it. But the ‘new architecture’ is ‘here to last’ he thought.

What next? He indicated that he does not see any new major international reforms coming up soon as the world is ‘fragmented’ (he observed both north-south and east-west divisions). While the UN can ease the negotiation process, he did not believe that they offered any prospect of a breakthrough.

Coming to the end of his remarks, Saint-Amans stated that there are big issues for the international community. These include global mobility of work. How do you address this question of borderless workers? The international community should work on that, he suggested.

Even bigger is “putting a price tag on carbon emissions”. More than 50 per cent of carbon emissions are not priced and the other half on average is priced at €4 (when they need to be priced at more than €100). Something needs to be done there – and urgently, He said.

The respondents

The first respondent, Heather Self, identified the multilateral instrument as the biggest single achievement of BEPS; getting consensus to update three and half thousand tax treaties in one go is an accomplishment.

Self suggested that it would be good to see withholding taxes proposals coming from developing countries and “get critical mass from enough other countries to be able to get a multilateral reallocation of tax resources”. She emphasised the importance of having a good dispute resolution system as she believes that BEPS has not focused early enough on that part of the process.

“Why do we worry so much about corporation tax?”, Self asked, noting that it is not the largest source of revenue. She urged more focus on indirect and carbon taxes. The African Tax Administration Forum has produced a paper proposing they stop developing complicated ways of measuring emissions and look upstream at a levy on production of source materials.

Tove Maria Ryding, the second respondent, began her remarks by saying that there is ‘no boring year in tax’ as there is no global deal on tax yet. She pointed out that over a third of the world’s countries have never joined the Inclusive Framework and have not accepted the two pillars of BEPS. This process is not fair in the eyes of developing countries, she argued.

Ryding explained why the United Nations is getting an increasing role on tax. This is because ‘the Africa Group’ tabled a resolution seeking a UN process and a UN convention on tax. “We had not seen that one coming, and we had even less seen it coming that it would be adopted by consensus at the United Nations,” she observed. “Suddenly we have a UN process on tax.” However, she continued, notwithstanding the vote, “we don’t have consensus on having a UN convention on tax and we even less have clarity on what that would even mean.”

Nevertheless, said Ryding, “the UN is, in my view, the only place where you can get clarity and a real global agreement on tax”. That is because at the UN all countries are on an equal footing, and there is much more transparency where civil society, observers and businesses can participate. There will not be a UN agreement in two years – it will take longer than that – but that may be a good thing if it build the ownership than means countries stick by the agreements they make; however, at least “you could get a truly global endorsement”, she stated.

Responding, Saint-Amans agreed with Self that too much attention is paid to corporate income tax. The amount of resource spent internationally by governments and firms, compared to the amount it raises, does not make sense, he opined. There was a race to the bottom but that has been stopped.

Saint-Amans acknowledged that large numbers of countries are not members of the Inclusive Framework. He agreed with Ryding that the only real, inclusive place is the UN. But when he was at the OECD his priority was to ‘stop the bleeding‘ – to reduce base erosion and profit shifting, to increase transparency – and this had been achieved.

Further discussion

Following speeches the audience put a number of questions to the panel, including:

How will United States politics and the result of the next presidential election affect the chances of the Pillar One agreement?

Ryding responded that it is not right to only look at one country as the chance of global endorsement, with more than 100 countries signing up to Pillar One, is zero.

Saint-Amans highlighted that it is not US politics but their constitution that divides powers. The executive cannot commit the legislative and two thirds of Senate must ratify a multilateral instrument – whatever its politics. He disagreed with Ryding’s suggestion that the US could be by-passed, saying “you cannot ignore where the money is” and that, if we move to unilateral measures, then we would be less stronger than the US.

The world is splitting between China and Russia on one side and United States and the West on the other. What are your views on the importance of the role global south countries will play? Will they be kingmaker?

Saint-Amans challenged the idea of a unified ‘global south’. He also pointed out that China and the United States are fully aligned in their interests in relation to Pillar One. He thought while the qualifying minimum tax may benefit countries like Switzerland, it would primarily benefit developing countries, enabling them to stop their ‘wasteful tax incentives’.

Is it likely that we see more demands for country reporting to be public?

Self answered that large corporates are not worried about the information being public but they are more concerned about the how the headlines will be written. Because “headlines often bear very little relation to what’s happening”.