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.
SHORT CASE REPORT FTT DECISION – ‘MTIC’ FRAUD – KITTEL TEST PTGI International Carrier Service Limited v. HMRC  UKFTT 20 (TC)
- A so-called “MTIC case”, in which HMRC alleged knowledge or means of knowledge of fraud. The taxpayer, PTGI, denied those states of knowledge. After a relatively lengthy trial, the Tribunal allowed the appeal of PTGI.
- The decision represents a good reminder that HMRC’s “MTIC” decision-making mould is not a “one size fits all”, unbeatable formula at the Tribunal. The Tribunal will robustly analyse HMRC’s (usually) inference-led allegations.
HMRC consultation on the OECD mandatory disclosure rules
HMRC has published a consultation on draft regulations to implement the Organisation for Economic Cooperation and Development (OECD) rules on mandatory disclosure of certain avoidance arrangements. Helen McGhee and Nahuel Acevedo-Peña explain the background to the new rules and their implications.
Post-Prudential: Decision released by the FTT
On 8 December 2021, judgment in the Post Prudential Group Litigation was handed down by the First-tier Tribunal (Tax Chamber) (“FTT”). These were appeals and applications for closure by approximately 200 taxpayers, who had made a variety of claims seeking repayment of unlawful DV tax imposed on dividends received from foreign portfolio holdings. The FTT considered the validity of these various statutory claims following decisions in test cases in the CFC & Dividend GLO, namely Claimants in Class 8 of the CFC and Dividend Group Litigation v Revenue and Customs Commissioners  EWHC 338 (Ch),  1 WLR 5097 (“Class 8”) and Prudential Assurance Co Ltd v HMRC  UKSC 39;  AC 929 (“Prudential SC”).
S&S Consulting Services (UK) Ltd v HMRC: Can a company be re-registered for VAT pending appeal?
On 26 November 2021, the High Court of Justice issued its judgment in S&S Consulting Services (UK) Ltd, R (On the Application Of) v HM Revenue and Customs  EWHC 3174. The case concerned the issue of availability of injunctive relief in the context of VAT deregistration appeals in the First-tier Tribunal (“FTT"). S&S also made an application for judicial review of HMRC’s decision to deregister it for VAT, which at the time of the hearing, had not yet been considered on the papers.
HMRC cancelled S&S’s VAT registration because it concluded that the company had been principally or solely registered to abuse the VAT system by facilitating VAT fraud. S&S denied any wrongdoing and claimed that it might become insolvent before the hearing of its appeal as a result of the deregistration.
It was also common ground that although S&S had lodged an appeal to the FTT, the FTT had no power to require HMRC to re-register S&S by way of interim relief pending the outcome of the appeal. S&S made an application to the High Court for relief.
Held: Application rejected.
VAT De-registration: the CJEU decision in the Promexor case
On 18 November 2021, the Court of Justice of the European Union (the “CJEU”) delivered its judgment in Case C-385/20 (Promexor Trade SRL v Directia Generala a Finantelor Publice Cluj – Administratia Judeteana a Finantelor Publice Bihor). Promexor is a Romanian company whose VAT number was revoked by the local tax authorities following a period of six months in which its VAT returns did not record any transactions subject to VAT. Under Romanian legislation, a company whose VAT number has been revoked could re-register and retroactively deduct input VAT for the period when it was not registered. However, in this case, Promexor was prevented from doing so because its director was also a shareholder of a company that was going through insolvency proceedings.