OECD offers multinationals tools for tax avoidance

Race to the bottom
The OECD wants to introduce a worldwide minimum level of corporate profit tax per country. At the moment, governments are lowering their income tax rates further and further. With a favourable (low) profit tax, countries try to attract as much activity as possible. Lowering these rates leads to tax competition between countries and a so-called "race to the bottom", resulting in lower amounts of profit tax being collected globally. With a newly developed set of measures, the OECD, in collaboration with about 140 countries, is trying to counteract this development. "Establishing a globally applicable minimum tax level and enforcing it worldwide should end unbridled international tax competition in the profit tax sphere," explains De Wilde in an opinion piece for NLFiscaal and Kluwer International Tax Blog.

Flaw in the blueprint
The OECD plan is to develop a benchmark, a minimum standard, in the form of a globally agreed minimum level of profit taxation for international corporations. The profit tax systems of the individual countries are then compared to this to see if they tax enough on the profits that these companies make within their territory. If the tax level becomes too low, other countries where these companies are active may subsequently raise their taxation to reach the minimum level. The ambition of the OECD is to reach a global political agreement on this as early as this summer.

There now appears to be a loophole in the blueprint of the measures presented by the OECD to this end, which will do just the opposite. This flaw could allow individual companies and individual countries to use differences between tax rules and accounting rules to manipulate the profit tax level so that companies only pay more tax on paper and thus meet the minimum level set.

The loophole arises because the OECD looks at the profit according to regular accounting for the minimum standard and not at profit according to tax accounting. Companies can then utilize this difference by having a group unit in a low-tax country take out a so-called hybrid loan from a group unit in a high-tax country. This is a loan on which interest is paid within the group, which does not lead to a deduction of tax for tax accounting but does for regular accounting. The consequence of this will be that the group unit in the low-tax country will present a lower profit for the application of the OECD minimum standard and a higher tax burden with the same amount of tax to be paid in the end. In reality, there is no lower profit at all, as the money stays within the concern, and there is no fundamental shift in capital. With such loan construction, every international company in every country could strategically present a tax burden that meets the minimum standard to prevent other countries from adding additional tax. If this is not resolved, you could disable the system's operation to a significant extent, according to De Wilde.

Other solution
De Wilde can imagine that the OECD is indeed aware of this problem and thinks that the OECD will try to solve it with a specific measure. The tricky part is that you never know whether you will not leave another loophole open because, in this way, you keep the initial approach in place. De Wilde, therefore, argues for a different system. In his opinion piece, he concludes with the following questions: "My feeling is that we might need to reconsider here after all. Is this really the solution? Couldn't there be more creative and more robust solutions?" According to him, these questions can be answered affirmatively, as several alternatives have already been presented, including by himself in his inaugural lecture in 2019.