The Shifting Sands of Global Tax Policy

Global tax policy in the last 10 years has been characterised by harmonisation and cooperation. BEPS 1 and 2, Country-by-Country Reporting, exchange of information and disclosure regimes – all of these are examples of Governments working together to align tax standards across the globe, with a particular focus on tax transparency and ensuring multinationals pay their ‘fair share’.

But are the sands beginning to shift? We are seeing a move away from stability and cooperation, both at the level of supra-national institutions and national Governments. In this article we take a top-down look at the tax policy trends and what might lie ahead. 

At supra-national institutional level we are seeing more struggle for consensus within key institutions, as well as more tension in the balance of power between those institutions.

At the OECD for example, Pillar Two may have made it over the line, but this was not without some tense negotiations and the US, in particular, shows no sign of implementing it any time soon. Conventional wisdom also suggests that the OECD will fail to get Pillar One across the line because the US is critical to its implementation but lacks the political consensus required for the Multilateral Convention to take effect.

At EU level, the Pillar Two Directive saw some high profile holdouts before it was finally agreed. More recently there are a long list of Directives currently stalled, due to a failure to achieve the required unanimity.

There are also signs that the balance of power between international institutions is shifting. The OECD has dominated the international tax scene since the second world war. But since the 2008 financial crisis, the EU has become more of a force. When the OECD rejected mandatory public Country-by-Country Reporting for example, the EU pushed forward and implemented its own regime. More recently the EU indicated it would develop its own alternative to Pillar One if that initiative fails at the OECD.

The UN is the latest institution staking its claim for more power in international tax policy making. Its concern that the OECD is controlled by wealthy nations that don’t properly represent the interests of developing and smaller nations - particularly the Global South – has led to it adopting a louder voice and an ongoing project to develop a UN convention on international tax co-operation.

These themes of reduced harmonisation and a more fractured tax policy landscape continue as we look at national Governments.

There are a number of common pressures causing a pull away from international alignment. Economic growth has largely stalled since the financial crisis and the pandemic has left nations with high levels of public debt. The invasion of Ukraine highlighted the importance of security of supply chains, particularly for energy, as well as the need to increase national defence spending. Finally, there are the financial challenges of transitioning to net zero and looking after an ageing population, with the increased pressure of this on health and social care.

Governments are increasingly chasing after tax revenues, whether that be through incentivising growth to yield higher taxes or increased audit activity. We are also seeing a changing dynamic around tax competition and protectionism. 

Perhaps the most significant example of this is in the US where President Biden’s landmark Inflation Reduction Act (IRA) epitomises how Governments are using tax policy to boost economic activity and break dependence on overseas states.

The IRA is nothing to do with inflation and everything to do with trade and climate policy. It contains $369 billion dollars of tax credits, loans and grants over 10 years to incentivise domestic manufacturing in the energy transition, reversing 30 years of offshoring.

It is not without its critics. Its highly interventionist approach makes the Government a key player in the market, leaving the policy arguably open to political change. This creates uncertainty for market participants - especially in an election year. There are concerns that the IRA contravenes World Trade Organization rules and will make international cooperation on green transition more difficult.

But it has been effective. 

It has also sent shockwaves across the Atlantic to the EU. The EU’s fear of flight of green tech investment to the US led it to adopt its own protectionist policy – the EU Green Deal Industrial plan. This relaxation of state aid rules allowed Member States to implement their own incentives for green tech. However, its success has been limited. The EU has been unable to match the scale of the IRA and efforts to react quickly and effectively have been hampered by EU bureaucracy. Smaller states have also raised concerns that it distorts competition within the bloc, creating winners in the large Member States.

The EU has already seen its own share of turmoil with a political shift to the right and a reduced centre-right / centre-left majority following the EU parliamentary elections in June. This shift is accompanied by more vocal EU-scepticism.

There is now a long list of EU Directives that seem stalled. We are unlikely to see the Transfer Pricing Directive or common corporate tax base (BEFIT) initiatives passing. The proposed Directive to prevent the misuse of shell entities for tax purposes (unshell) has been in discussions for almost three years.

The EU regularly poses the idea of Qualified Majority Voting (QMV) to replace the unanimity currently required for direct taxation. This alternative is unlikely in practice not least because, in the absence of a more creative solution, the move to QMV would itself require unanimity.

All of this means that in the future we expect to see less harmonisation on tax in the EU, possibly with less focus on green and net zero. Existing initiatives such as the Carbon Border Adjustment Mechanism (CBAM) will continue, but new green policy may be thin on the ground. 

Across institutions, whether it be the OECD, the UN or the EU, there may be another shift. After 10 years of initiatives targeting multinationals, the wind seems to be changing direction somewhat. 

We are seeing an increased focus on High Net Worth Individuals (HNWIs). Already jurisdictions such as the UK, Italy and the Netherlands are beginning to limit tax incentives for HNWI’s.

This coincides with increased discussions across institutions of a global wealth tax. The matter was proposed as a priority protocol in the draft Terms of Reference for the UN framework Convention on International Tax Cooperation. In a recent report to the G20 Finance Ministers a global minimum wealth tax was recognised as an area that needed further work. 

As one would expect, the idea divides opinion. The US has come out strongly against it. Without US support a global wealth tax might be difficult and national wealth taxes have a checkered history.

10 years ago we would not have thought a global minimum tax would be possible. It is a testament to the tenacity of the OECD’s Inclusive Framework that it has got over the line, albeit with some complexity and a much increased compliance burden for affected multinationals.

Recent geo-political events may mean that international harmonisation and consensus will be more difficult in the next decade. This is not a good thing. Whilst international solutions do increase complexity in our taxing systems, they are still generally preferred to unilateral action and the downsides that can bring.

Managing a business’s tax profile in what looks like an increasingly fractured global tax landscape will have its challenges, and tax leaders will need to be increasingly agile in developing effective strategic responses across increasingly divergent jurisdictions.