Is a new multilateral convention a step forward towards an agreement on international tax or are we just spinning wheels?
- An interesting Inland Revenue technical decision summary on the foreign investment fund regime.
- How practical is a financial transactions tax?
- What now after the election?
Last week, the OECD/G20 announced a new multilateral convention had been agree in relation to Amount A of Pillar One of the international tax agreement.
Pillar One is the part of the international agreement which allocates the taxing rights to market jurisdictions with respect to the share the profits of the largest and most profitable multinational enterprises which are operating in that jurisdiction’s markets, regardless of whether or not the multinational has a physical presence.
This multilateral convention is also intended to ensure the repeal and prevent the proliferation of digital services taxes and other similar measures. Based on 2021 data, the OECD/G20 estimate that this should result in about US$200 billion of profits being reallocated each year. This should represent an approximate additional corporate income tax of about between US$17 and 32 billion.
Although the convention has been signed, we’re still working forward towards the actual final detail and agreement on the application of Pillar One and for that matter, we’re also working forward on the application of Pillar Two. This multilateral convention, by the way, extends to perhaps 800 pages so you can see the level of detail involved.
Yeah, but are we getting there?
You may think we’ve heard this sort of announcement before, and we have. What’s happening is the framework of how the final international agreements will operate is being put into place very slowly. But, and it’s a big but, are we actually going forward and is an agreement on the cards? And that’s where a fair bit of scepticism is starting to develop amongst those in the international tax community who deal with international tax issues day in, day out. (I have to be honest that most of this stuff involving the multinationals is way above my pay grade).
There was a particularly interesting article this week on the matter by Rasmus Corlin Christensen, a political economist at the Copenhagen Business School.
In short, he is highly sceptical of exactly what progress is being made on this and whether, in fact an agreement is as close to agreement as is being touted by the OECD/G20.
His blog post discusses the history of the Pillar One and Pillar Two process from when it started about ten years ago. He notes the tensions that have arisen around the agreements, like all tax, comes down to politics. As he explains, the initial drive for an agreement came from the French, and the Americans have been pushing back because it’s their multinationals that are most likely to be taxed. Although, as he rather wryly notes, Ireland has a big part to play in this because that’s where quite a bit of the profits from larger multinationals such as Apple, for example, are centred.
It’s a good read explaining the whole topic and but he thinks ultimately what will happen is that various pressures will build on the topic as the political posturing and manoeuvring goes on between the Americans and Europeans. But Christensen also points out that emerging nations, in particular Nigeria, the largest economy in Africa, are starting to push back wanting to see some progress.
The concern is if no agreement is reached then the Americans have already indicated as they did so under President Trump, that they will deploy trade weapons and tariffs. No one wants a trade war and that’s where Christensen thinks that this may force the issue bringing about some form of agreement.
Quite apart from the Europeans and Nigeria he also noted that Canada has broken ranks by going forward with a digital services tax. You may recall that just before Parliament rose for the election, the Labour government introduced a digital services tax. This is a fallback in case the Pillar One and Pillar Two negotiations don’t proceed.
But if you’re reading between the lines here, from what Rasmus Corlin Christensen is saying, it’s quite possible that we’re going to need that. And as he notes,
“But there’s really nothing puzzling about Canada’s move, or the proliferation of digital taxes globally. International corporate tax policy has risen to the top of national and global political agendas, with governments individually and collectively asserting their authority against the forces of globalization – a significant shift from years past.”
And this, by the way, fits in with how I see tax policy internationally developing, the era of low taxation globally and corporate tax in particular is over. Governments’ balance sheets and finances, including our own, are under strain. Everyone is looking under all available rocks as to what funds might be available.
Christensen’s article is well worth a read with a different perspective on international tax away from the sort of “rah rah rah it’s all great” messaging coming out of the OECD/G20. He focuses on the politics, but doesn’t necessarily see that this deal isn’t going to happen, it just may happen in a different way than is presently planned.
Good news on the Foreign Investment Fund front?
Still on the subject of international tax, Inland Revenue released an interesting Technical Decision Summary in relation to the ability to change foreign investment fund (FIF) calculation methods. This is a private ruling where the applicant has interests in a number of foreign trusts, unit trusts and companies subject to the FIF rules and the attributable FIF method. The taxpayer hadn’t filed a tax return at this point and they wanted to apply for a ruling as to whether in fact they could change methodologies under the FIF rules.
In certain situations, taxpayers can change their FIF calculation methodology between the fair dividend rate and the comparative value. However, in other circumstances and other entities a taxpayer must apply the fair dividend rate. This is an interesting ruling because it gives clarity around this issue and that and on the basis of these facts, and everything is always be very fact specific, you can change methodologies.
The big caveat I would add here is that a critical fact may well be that they hadn’t actually filed returns because there’s been a bit of controversy about Inland Revenue saying that if a return has been filed adopting one methodology, then you can’t adopt a subsequent change in methodologies in most circumstances. And I just wonder whether that was a factor in this ruling. It’s not a formal Inland Revenue ruling, so it may well be converted to one subsequently. But still, it’s interesting to see some guidance on an area where there’s a bit of controversy developing.
Is a Financial Transactions Tax really worthwhile?
Early in the week, I spoke about how the New Zealand Loyal party had campaigned on a financial transactions tax (FTT) as a replacement for income tax and GST. The last Tax Working Group had looked at the question of a financial transaction tax and come down against it. Generally speaking, no one is overly sold on the idea, but it is something that frequently pops up in discussions or when I’m in public forums. It’s sometimes called a Tobin Tax after the economist who dreamed up.
The idea behind a FTT is the fact that there are vast sums of money flushed through financial systems and on the basis of the good old principle of broad base, low rate, a very small charge on this could raise significant sums of money.
It so happened in reading on the topic, I came across a new working paper by Gunther Capelle-Blancard of the University of Paris’ Centre for Economic Studies of the Sorbonne. The paper takes a fresh look at the whole question of financial transactions tax and particularly looks at what happened with Sweden’s tax which failed badly, and that of France which introduced one in 2012. The French financial transactions tax hasn’t gone as well as expected, but even so, it’s still raising close to €2 billion after nearly ten years of implementation.
The French and Swedish experience
Two main objections to a FTT are firstly, it will encourage displacement, people will take their activity and trade elsewhere outside that jurisdiction. Secondly, people will reduce the volume of transactions to mitigate potential charges. According to the paper there certainly appears to have been a reduction in the volume of transactions happening.
But the displacement activity, which was a big problem for the Swedish financial transaction tax, so much so it was abandoned, doesn’t appear to be the same issue for the French because it’s better designed on that. The key difference being that under the French system it is the nationality of the company that issues the shares, which is subject to the to the financial transaction tax and not that of the counterparties or intermediaries carrying out the transaction. In Sweden, it seems what happened was the activity which would have been done by Swedish stockbrokers, was instead performed outside the country and therefore no financial transaction tax applied.
What about Stamp Duty?
But the other thing that I thought was very interesting and I hadn’t actually considered it beforehand was that Capelle-Blancard has also looked at the example of Stamp Duty on financial transactions. This still applies in the UK at a rate of 0.5% on all share transactions. When you take a broader view, stamp duty is a financial transactions tax. It doesn’t apply as broadly as those proponents of a FTT would want, but it still applies. In the case of the UK stamp duty on share transactions has applied since 1694 and raised £4.37 billion for the year ended 31st March 2022. We repealed stamp duty in 1995 if I recall correctly.
This is an interesting paper, well written and quite understandable, which takes a different perspective on a topic which has been pooh poohed on reasonably strong grounds. But a FTT may actually not be as impractical as has been mooted. What I would say is even if it’s more practical to implement than people have said there is no way that it would ever replace income tax and GST, as the New Zealand Loyal party promoted and many people think it can do, because you would have to impose quite a high charge on transactions. And you would then very definitely see a large displacement/reduction in activity.
The paper notes some absolutely eye watering numbers about the growth in the level of financial transactions “Since the 1970s, global GDP has multiplied by 15 times, market capitalisation by 50, and the amount of stock market transactions by 500.” In France, for example, the total amount of transactions in the Paris Stock Exchange has grown from €3.5 billion in 1970 to over €2,000 billion today.
These absolutely eye watering numbers are why people think a FTT could raise a lot of money. The paper estimates a FTT could raise perhaps as much as between €156 and €260 billion annually, based on a nominal rate of 0.3 or 0.5 per cent. I think people will still look at the idea with some scepticism, but in fact as the paper notes, and I didn’t realise, FTTs are more widely spread than many might realise.
The Election’s over, now what?
Finally, the Election is over, and we’re now waiting to see the exact composition of the Government and what involvement Winston Peters and New Zealand First may have. What does that mean for tax? Well, we will have to wait and see. The expectation is there will be some form of tax threshold adjustments coming up starting from 1st April next year and obviously rollback of the rules around interest limitation for residential property landlords.
But I would just point everyone to the example of the New Zealand First National Coalition Agreement in 1996. National went into that election having already implemented a set of tax cuts which took effect from by sheer coincidence of course, on 1st July 1996, just before the election. There was another round of tax cuts to follow shortly afterwards. But under the agreement that was eventually hammered out, which made Winston Peters, Treasurer/Finance Minister, the second round of tax cuts was delayed for a year.
I’m therefore just wondering whether Winston and New Zealand First might just have a look at the books and say, “Ah, maybe not this time”. And of course, you’ve also got Act on the other side saying, “We want to see some movement on this pretty quickly.” So ,the new Government and the expected Prime Minister, Mr. Luxon, have got some negotiations ahead, which might turn out to be trickier around this issue than we’d all first imagined.
Well, that’s all for this week. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening and please send me your feedback and tell your friends and clients. Until next time, kia pai to rā. Have a great day.