International tax reform makes important step forward, but much detail yet to be clarified – says KPMG UK

• Businesses will be encouraged by dispute resolution mechanism which, if designed well, will help reduce tax uncertainty

The ongoing efforts to reform international taxing frameworks have taken a significant step forward with more than 90 per cent of a group of 139 countries negotiating the details of the deal signed up to a consensus statement. This development builds on the communique issued by the G7 meeting in early July.  The international community has agreed a two-pillar programme: the first pillar will address the global distribution of profits and taxation rights for large multinational companies, while the second pillar will establish a minimum global corporate tax of at least 15%.

Tim Sarson, Partner and Head of Tax Policy at KPMG UK, said: “Securing the agreement of 130 countries for the latest OECD proposals is a significant step forward that gives the push for reform further momentum, increasing the probability that it will be ultimately successful.

“Bringing China on board is a big win. They were seeking a carve out for substance-based incentives – which encourage investment for industries based around physical activity. This was not in the G7 communique, but it is in this latest statement and its inclusion may have been pivotal in persuading China to add its name to the statement. This exclusion may see governments more generally focussing tax incentives on asset and labour-intensive activities, which may be of interest to a post-Brexit Britain as it seeks to establish its niche in an environment where it is not subject to EU state aid rules. As was widely reported, this latest statement also includes an exemption from the first pillar for financial services - a victory claimed for the UK by Rishi Sunak, the Chancellor of the Exchequer.

“While the international community is rightly buoyed by this development, the hard work has only just begun and the timetable for all of the technical detail to be bottomed out by the Autumn, with implementation scheduled for 2023, is ambitious. Getting the fiendishly complicated detail resolved in just four months would be lightning pace in the world of international tax reform.

“On the ground, any change will impact compliance burdens for businesses who will have to introduce changes to their data reporting systems to ensure they can correctly apply the new rules. In particular, taxpayers have feared that any change to the rules could lead to years of costly and time-consuming international tax disputes as tax authorities argue over what slice of profits is taxable in their jurisdiction. They will have been heartened to see a clear statement that the intention is for a mandatory and binding dispute resolution mechanism. The statement was short on detail of how this would work, but it was an area of concern for business and the recognition of this will be welcome.”

 

ENDS

Notes to editors:

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