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The Devil in the Details: What are the Major Flaws of the New Global Minimum Tax Reform?

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Over a hundred world economies embraced the concept of a minimum corporate tax rate of at least 15% in a bid to ensure that multinational enterprises (MNEs), including tech giants Google, Amazon, Facebook and Apple, pay their fair share of taxes.
A new tax regime formally signed by 136 countries and jurisdictions on 31 October will come into force in 2023, making it harder for multinationals to avoid taxation and bringing in an extra $150 billion in taxes per year.
The Organisation for Economic Co-Operation and Development's (OECD) tax reform will affect corporations with global sales over 20 billion euros ($23.1 billion), annual revenue above 750 million euros ($865 million), and profit margins above 10%.
The plan has two major objectives: first, to stop multinational companies from shifting profits into low-tax havens; second, to address the increasing digitalisation of global commerce by taxing companies, in part, based on where they do business instead of where they book profits.
On the surface, the idea looks good and does represent a very important step forward in the multilateral governance of taxation, according to Giuliano Noci, professor of strategy at Milan's Polytechnic business school.
"In this perspective, it represents the start of a process aimed at reducing fiscal asymmetries among countries that have so significantly affected corporate decisions on how to place their legal base," Noci explains.
At the same time, the digital giants' free ride appears also to be coming to an end: they will be progressively under political scrutiny, according to the professor.
"For their top management, this means that lobbying the government is not enough," Noci remarks. "They have to be more transparent about their actions (data collection and analytics) and demonstrate more responsible behaviour."
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Obstacles in the Path of the Implementation of Tax Reform

Still, as always, the devil is in the details, highlights the academic: first, every country has to approve the specific normative framework and this may delay its real implementation. Second, it will be not easy for national governments to identify precisely which corporate revenues will be taxed, the professor suggests.
In addition to that, it would require over a hundred countries to uniform rules on taxation which, in its turn, would be hard to police, warns Steve Keen, honorary professor of economics at University College of London and author of "Debunking Economics".
"You actually need, in that sense, a global reporting authority to say what were the reported tax rates and that actually match the policy," Keen says. "I think the hardest thing here is going to be enforcement."
When it comes to digital giants there are still many ways for them to avoid increased taxation, although they will no longer be able to literally pay zero tax on billions of dollars of recorded profit in some countries, according to the professor.
To illustrate his point, the economic expert explains that the plan is based on the idea of income, and this income could be artificially reduced by "redistributing" what they declare as profits: for example, a corporation can buy something from a related entity.
"So Google in Ireland can buy something from Google in the Cayman Islands," Keen notes. "And if Google in the Cayman Islands charges a high enough price, then Google in Ireland makes no profit."
It will not be an easy task for national authorities to establish the IP locations of all users in order to determine their jurisdictions and tax Big Tech accordingly, echoes Suranjali Tandon, Assistant Professor at a Delhi-based National Institute of Public Finance and Policy.
On the other hand, the OECD tax reform will really fly only if a critical number of low tax countries will sign this for it to be effective, she stresses. "Moreover, source countries are left to negotiate a higher tax through bilateral treaty renegotiation," Tandon says, adding that "the dispute resolution mechanism may not be representative".
As for tax avoidance, it "always keeps a step ahead of regulations", the professor emphasises.

"This is evident from the Panama papers, Paradise papers and Pandora papers," she says. "It is possible that companies may fragment operations as well as lobby for the removal of the tax if the compliance costs outweigh the gains from removal of DSTs."

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For his part, Christopher Bovis, professor of international business law at the University of Hull, warns that the key problem to the new tax reform "will be the renegotiation of the OECD treaties for the avoidance of double taxation". According to him, these international instruments are of "antiquated nature and so far have been responsible for many near tax evasion situations of multinational companies and high tech platforms".
The aforementioned hurdles shouldn't discourage the countries from implementing the new approach; on the contrary, they need to take more efforts to adhere new tax regulations to existing realities, according to the economic observers.
"The Statement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy intends in bringing the international tax system into the 21st century by fundamentally reform international tax rules to bring the disruptive competitors, often described as the winners of globalisation, on equal footing with the traditional economic sectors in developing and developed countries," Bovis emphasises.
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