So you dislike the OECD global minimum corporate tax? Tough. The UK now has to implement it, or we’ll lose out.

The reason for this is simple:

There are 137 countries coloured on that map. Each has signed up to the OECD global minimum tax (sometimes referred to as GLoBE or “Pillar Two”).

Some are already implementing – including such free market stalwarts as Singapore. Others are discussing implementation details. And many others have signed but are yet to kick off implementation – international tax measures are always slow, and there have been distractions. There is an interactive version of our OECD globe here.¹And the code is on our GitHub here

This means GLoBE is likely to have a critical mass of implementing countries. Its design renders that very important.

GLoBE’s design brilliance

There have been many other international tax proposals over the years to end, or at least reduce, “tax competition”²Views differ on what precisely “tax competition” is, whether there has been a “race to the bottom”, and whether it is a good thing, bad thing or both. This post isn’t about that – it’s about the narrow question of how Pillar Two works, and the incentives it creates. They’ve almost³The big exception is the Destination-Based Cash Flow Tax, which I will write more about in the future suffered from a fatal flaw – they reward countries that don’t follow the crowd. It’s a particular problem with the various unitary tax proposals where every country taxes companies on the basis of the same formula (which typically takes into account the location of sales, employees and assets). That creates a massive incentive on countries to apply a slightly different formula – tada, tax competition is back! And an obvious incentives for other countries to simply not sign up at all.

The OECD global minimum tax is much smarter than that. It has three main components:

• When a multinational group is headquartered in a country, that country gets to apply a “top-up” tax if the multinational has subsidiaries in a country where it pays a less than 15% effective rate of tax.
• So if a UK-headquartered widget-making multinational makes £100m of profit in its French subsidiary, which pays £20m in French tax, then the UK charges no top-up. But if it also has a Cayman Islands subsidiary which makes £100m of profit, on which it pays £0 of tax, then the UK applies a top-up tax of 15% x £100m = £15m. Naturally, the details are a bit more involved than this.⁴Okay, it’s horribly complicated, with 70 pages of rules, 111 pages of administrative guidance, and 228 pages of commentary. Anyone who thinks they have a pet solution to international tax which wouldn’t involve hundreds of pages of rules is welcome to write their proposal down in detail, and see how they do.
• Countries have the option of applying a domestic 15% minimum tax themselves. So, in the above example, the Cayman Islands might think it’s just leaving money on the table. The multinational is going to pay £15m on its Cayman Islands profit, but will be paying it to the UK. If the Cayman Islands instead collects the £15m itself then it makes no difference to the multinational, but it makes £15m difference to the Cayman Islands. And the UK doesn’t get to collect the £15m. It remains to be seen if countries like the Cayman Islands will do this. But plenty of other countries will – including the UK.
• So we can expect a multinational to pay some 15% minimum tax in the countries where it has subsidiaries, and then a bit more in its headquarters jurisdiction (topping up to 15% the tax on the profit it makes at home, and adding on additional top-ups for the subsidiary countries that don’t have domestic minimum taxes).
• What if the headquarter country in fact doesn’t implement the minimum tax? On the face of it, that makes it a wonderfully attractive headquarters country for any multinational who wants to continue to keep the benefit of tax havens (because their 0% tax would never be topped up). And indeed it would be a fantastic option for a tax haven that wants to attract multinationals’ headquarters. But. At this point, we see the brilliance of the OECD’s design (for which successive British Conservative Governments should take some of the credit). The top-up tax which the headquarter country should collect, but doesn’t, is instead collected by all the countries where it has subsidiaries under the “under-taxed payments rule” (UTPR).⁵Again I am simplifying a very complex rule. I rather expect the main “top-up” rule will mostly work smoothly in practice, even if in theory it has lots of elements which are difficult to apply. By contrast, the fact the UTPR is a backstop means that many countries won’t be used to applying it, and practice is likely to be less consistent both within countries and between different countries.

So here’s what happens if the UK doesn’t implement the global minimum tax:

• The UK loses the ability to apply a “domestic minimum tax” to the profits of foreign multinationals operating in the UK. Those multinationals still pay the tax, but they pay it (most likely) in their headquarters jurisdiction. The UK leaves tax on the table.
• The UK loses the ability to apply the global minimum tax to the profits of UK-headquartered multinationals. Those multinationals will still pay the tax, but they’ll pay it in little chunks in all the countries where they operate over the world. The UK leaves more tax on the table.
• Those little chunks are extremely complicated chunks. The UK multinationals will consider this a bad result – they’d much rather pay the tax in one go in the UK, rather than have to go through a set of rules in each subsidiary country (and they’re rules that the countries won’t be very used to operating, and very plausibly will work out a bit of a mess).

There is no upside here. Failing to implement is worse for both HMG and UK plc.

And this is why even countries that you might expect to duck GLoBE are in fact adopting it. Singapore and Switzerland, for example – with the Swiss even voting for it in a public referendum.

The arguments against implementing GLoBE

Priti Patel says that GLoBE is “permanent worldwide socialism”, and says in her Telegraph piece:

There are several responses to this.

The first is that, no matter how bad she thinks GLoBE is, I’m afraid she’s just too late. This is an argument Patel could have made in 2021, when the UK could probably have derailed the whole process on its own. But GLoBE has reached critical mass and the only rational course of action is to join the party.

The second is to wonder why, if GLoBE is “permanent worldwide socialism”, Patel’s own government, when she was Home Secretary, was instrumental in creating it.

The third (and least important) response is that this isn’t a very good argument. It’s true that the new OECD rules mean that the UK and other countries have a minimum 15% corporate tax rate. It’s also true that some forms of subsidies are permitted under the OECD tax rules⁶“Qualified Refundable Tax Credits” – and, again, this gets very complicated very quickly. But the UK is in exactly the same position here as everyone else. A pound spent on tax cuts is the same as a pound spent on subsidies. If we could afford to dish out £ in tax cuts and special tax reliefs, we could equally afford to pay out the same amount in GLoBE-compliant subsidies.

In any event, the idea that the UK would ever have had a corporation tax rate below than 15% is fanciful – no mainstream politician has ever argued for reducing it below 17%. There’s plenty of scope for tax competition or (if you prefer to put it differently) changing aspects of the UK tax system which plausibly hold back growth. Here are some ideas:

• Repeal ancient taxes which raise no money but cost business ££££ in administration.
• Abolish the “cliff edges” which impose high marginal rates on people earning relatively modest sums, and incentivise small businesses to stop growing.
• Review hideously complicated tax legislation which nobody understands, and impose costs on large business. The EU legislated the OECD hybrid mismatch rules in a few pages of principles; the UK has 22 pages of dense legislation and 484 pages of guidance.⁷There’s an argument that this drafting approach creates more certainty and ease of application. Anyone who’s advised on the UK hybrid mismatch rules will not agree.
• Stop changing key aspects of corporation tax – particularly the rate and investment reliefs – every year. Business needs certainty more than almost anything else.
• Replace the non-dom rules with something that’s much easier for normal people to apply. Depending on your political preferences, you could keep the ability for long-term UK residents to benefit from the rules; or you could restrict/abolish it. But, either way, surely we can make it more workable, and end the incentive to keep assets/cash outside the UK?

When I was in practice, I often advised multinationals looking for a headquarters location, and undecided between half a dozen different countries. They weighed every factor you can think of: transport links, trade agreements, telecommunications, education system, cost of living, culture, personal tax and corporate tax. Of these, corporate tax wasn’t near the top of the list, and when it was considered, certainty (or lack of) was perceived as a much more important factor than the rate.

By contrast, corporate tax is an absolutely key element in attracting profit-shifting special purpose vehicles, with the rate being less important than the base (i.e. if you can offset almost all your profits with magic payments to Bermuda then the rate of tax on the remaining profit becomes of academic interest). GLoBE definitely stops that, at least for MNEs, but it’s not a game the UK has much need to play.

Good arguments against implementing GLoBE

Here are two much better arguments.

Everything above assumes that other countries are going to implement? What if they don’t?

A fair point. The UK implemented the last set of OECD tax proposals years before the EU and most other countries. I don’t think it’s wise to repeat that, and HM Treasury should make regulations that allow it to defer implementation until a critical mass of countries are themselves about to implement.

Hang on, the US hasn’t implemented this. There is no critical mass!

It’s certainly true that the US is the obvious blank space on the rotating globe above.

The Trump Administration in many ways inspired and enabled the global minimum tax with its GILTI rules, which are similar but more limited to the OECD minimum tax. The Biden Administration now probably wishes it could sign up to the OECD rules – but passing tax legislation through Congress is always challenging, and in recent times close to impossible.

So that means US-headquartered multinationals will be subject to the UTPR, which is highly unpopular with some Republican congresspeople. Whether they can do anything about it is another question. If 2024 sees a Republican President elected then things could become very complicated, with a tax/trade war not out of the question. But absent that, the US’s non-participation is unlikely to have any implications for the rest of us.

GILTI and other features of the US tax system make it an unattractive headquarters destination, and UTPR will be a problem for its multinationals for some time to come. The US’s absence won’t stop GLoBE from achieving critical mass.

• 1
  And the code is on our GitHub here
• 2
  Views differ on what precisely “tax competition” is, whether there has been a “race to the bottom”, and whether it is a good thing, bad thing or both. This post isn’t about that – it’s about the narrow question of how Pillar Two works, and the incentives it creates
• 3
  The big exception is the Destination-Based Cash Flow Tax, which I will write more about in the future
• 4
  Okay, it’s horribly complicated, with 70 pages of rules, 111 pages of administrative guidance, and 228 pages of commentary. Anyone who thinks they have a pet solution to international tax which wouldn’t involve hundreds of pages of rules is welcome to write their proposal down in detail, and see how they do.
• 5
  Again I am simplifying a very complex rule. I rather expect the main “top-up” rule will mostly work smoothly in practice, even if in theory it has lots of elements which are difficult to apply. By contrast, the fact the UTPR is a backstop means that many countries won’t be used to applying it, and practice is likely to be less consistent both within countries and between different countries.
• 6
  “Qualified Refundable Tax Credits” – and, again, this gets very complicated very quickly
• 7
  There’s an argument that this drafting approach creates more certainty and ease of application. Anyone who’s advised on the UK hybrid mismatch rules will not agree.