Getting Closer: A Global Minimum Tax on Corporations
On 1 July 2021, US Treasury Secretary Janet Yellen announced that countries representing over 90% of global GDP had agreed to a global minimum tax on corporations (“GMCT”). The GMCT seeks to put a floor on tax competition on corporate income through the introduction of a minimum corporate tax of at least 15%. Whilst certain elements give rise to positive expectations, some caveats should be noted. Much will depend on (1) the outcome of future political negotiations and (2) the detail of the drafting at international and national levels.
The key advantages of the agreement so far
- 133 countries have joined a new two-pillar plan approach to reform international taxation rules. This is not only the largest agreement ever signed on this matter, but it also includes low-tax jurisdictions, such as Bermuda and the BVI.
- US Secretary Yellen has declared that not all countries need to sign up, as Pillar Two of the agreement establishes a top-up tax on parent companies in respect of the low taxed income of subsidiaries, which would decrease the leverage of tax havens. This is a key detail to watch in relation to the agreement and its local implementation.
- The agreement is supported by international organisations such as the G20, the G7 and the OECD. This support is not surprising, as studies have found that “phantom FDI” - investments that pass through empty corporate shells, having no real business activities - increased from 31% of global FDI in 2010 to 38% in 2017.1
- In-scope multinational enterprises (“MNEs”) are those that meet the €750m threshold as determined under BEPS Action 13 (country by country reporting).
- The GMCT is expected to raise c.$150bn in additional global tax revenues2.
- Additionally, Pillar One allocates profits to market jurisdictions whose customers contribute to the success of large MNEs, without raising fiscal revenue in return. This would benefit several countries. For example, one estimate is that between €6 -15bn would be raised in France, Germany, and the US,3 thus explaining the political popularity of the agreement, particularly in the wake of the Covid-19 pandemic.
- Pillar One also includes dispute prevention and resolution mechanisms to avoid double taxation for in-scope MNEs. As yet there is little detail on these provisions.
The key caveats so far
- The Biden administration supports a GMCT, but the GMCT is a part of a two-pillar package deal. Republican opposition is concerned that Pillar One will relocate 30% of the targeted MNEs’ global profits from the US to “market jurisdictions”. Without Republican support, it would take one Democratic senator to vote against the proposal for it to fail in the US.
- In the last few years, several countries have introduced Digital Services Taxes (“DSTs”), which are considered discriminatory by some US politicians. The GMCT’s success may, therefore, also depend on the abolition of these DSTs. The European Commission has announced that it will postpone its DST proposal, prioritising the GMCT agreement instead.
- Some countries are opposed to the GMCT, including EU members Ireland, Hungary and Estonia. For example, the Irish Minister for Finance recently said that Ireland could not be part of the GMCT agreement with a 15% global tax rate. This is expected, as almost two-thirds of Ireland’s inward FDI is “phantom”.4 Reluctant signatories may seek to establish ways to incentivise investment, despite the GMCT.
1 IMF, ‘The Rise of Phantom Investments’ (September 2019).
2 OECD, ‘130 countries and jurisdictions join bold new framework for international tax reform” (1 July 2021).
3 Conseil d’analyse économique, ‘Taxation of Multinationals: Design and Quantification’ (29 June 2021).
4 IMF, ‘What Is Real and What Is Not in the Global FDI Network?’ (11 December 2019) IMF Working Paper No 19/274.
Offshore Structures and Onward Gifts
The so-called “onward gift” tax anti-avoidance rules were introduced by the Finance Act 2018 to complement the changes brought in the previous year aimed at restricting the UK tax privileges afforded to non-UK domiciled individuals. The rules were designed to close some perceived loopholes in relation to the taxation of non-UK resident structures (including but not limited to non-UK trusts). With effect from 6 April 2018, it would no longer be possible for an individual to receive a gift without questioning its providence, particularly where family trusts are involved.
The rules were designed to prevent non-UK structures from using non-chargeable beneficiaries as conduits through which to pass payments in order to avoid tax charges. Gone are the days of “washing out” any trust gains that could be matched to offshore income or gains by prefacing a payment to a UK-resident taxable beneficiary with a non-taxable primary payment to a non-UK resident beneficiary.
“It is notoriously challenging to prove a negative (especially to HMRC) and even more tricky where the taxpayer must speak to someone’s intention other than their own.”
Note that the new rules will apply where funds are received from non-UK resident structures before 6 April 2018 to the extent that they are subsequently gifted after that date.
Increased Investment in Personal Tax Compliance in the UK
Changes in public opinion, advances in technology and increased international fiscal co-operation have made global personal tax compliance initiatives pop up in abundance in recent years. In addition, the Russian invasion of Ukraine and the corresponding economic fallout have prompted governments to increase transparency in relation to investments by wealthy foreign individuals in their countries.
The UK’s HMRC is one of the most sophisticated tax collection authorities in the world and the department is making significant investments in technology in the field of compliance work.
It should therefore be well placed to take advantage of new international efforts to increase tax compliance, particularly against the backdrop of the already extensive network of bilateral tax treaties in the UK, and not forgetting that the UK was a founding member of the OECD’s Joint International Taskforce on Shared Intelligence and Collaboration (JITSIC) forum.
This article discusses the main developments in support of the increased focus on international transparency and tax compliance in the UK. There are other international fiscal initiatives, particularly in the field of corporate taxation, but such initiatives are beyond the scope of this article.
Case note: Lynton Exports (Alsager) Ltd v Revenue and Customs Commissioners  UKFTT 00224 (TC)
As HMRC continue to apply the Kittel principle to increasing numbers of industries and businesses, taxpayers need to be vigilant about evidential requirements that HMRC must fulfil in order to discharge their burden of proof. Read JHA’s latest insight into the First-tier Tribunal’s decision in Lynton Exports (Alsager) Ltd v Revenue and Customs Commissioners  UKFTT 00224 (TC).
If you require any further information about the Kittel, Mecsek, and Ablessio principles, or any other allegations by HMRC of fraud or fraudulent abuse, please contact Iain MacWhannell (firstname.lastname@example.org).
Preparing for the Possibility of a Domicile Enquiry
Helen McGhee, a director and chartered tax advisor at Joseph Hague Aaronson, explores who might be vulnerable to an HMRC enquiry on domicile and how best to deal with such enquiries.
The Kittel Principle - Sweet Sixteen
The following is an article written by David Bedenham about HMRC’s wide-ranging application of the ‘Kittel principle’. The current focus appears to very much be on the labour supply industry and the allegation of ‘Mini Umbrella Company Fraud’ (or ‘MUC Fraud’). This article highlights the need for taxpayers to get specialist advice at an early stage when faced with a Kittel decision. If you have any queries about Kittel-related issues or similar denials of input VAT or assessments to VAT, please contact Iain MacWhannell (email@example.com).