Janet Yellen has, according to the FT, called for a global minimum corporation tax rate. I welcome the move. I actually wrote a paper suggesting this in about 2008. After consultation I never put it out: at the time it was felt to be way too impractical to even propose. How times have changed.
This proposal is likely to gain traction. The OECD backs it. So too do civil society, which matters these days. But let me add a few words of caution.
First, the rate has to be high enough. Something approaching 20% would make sense, but may be optimistic given the considerable deductions available in many tax systems.
Second, that then hints at the second issue. What is going to be compared with what here? It needs to be based on economic substance and so must be related to accounting profit. But what profit? The group is a starting point but tax is not paid on a group basis, but by country. And what is known is that profit is shifted between countries. So the figure has to be group profit apportioned to country. Unsurprisingly country-by-country reporting can achieve this goal, but not using the OECD's data, which used aggregated and not consolidated accounting information by country, which means it can be gamed far too easily. The GRI version would provide a better result, but I declare an interest as I was on the committee that advised on it.
Third, there is the problem of determining what tax charge is to be considered. Deferred tax has to be ignored. It is quite literally made up and is, of course, never paid, so it must be discounted, entirely. But what we also know is that historically the current tax provision in most accounts is also overstated. I first noted this in 2006 and more recent evidence suggests that the trend continues. Companies over-provide for their current tax and then release their provisions when their tax avoidance proves to be effective. So the tax provision in the accounts of a company for any one country may also not be the right basis for determining an acceptable effective tax rate by jurisdiction.
Is cash paid the right basis, then? It may be, but critically this has to relate to a year rather than be the sum paid in a year. This will take time to calculate, and be subject revision. What time period for adjustment will be required? And how will time for resolution of audit issues be addressed, because this is a big issue?
None of these issues is in any way insurmountable. However, significant thinking is required and the mistakes that are such a feature of the OECD country-by-country standard must be avoided. Good sentiments have to translate into sound practice to deliver tax justice. There will be a lot to discuss. But let's still welcome this chance to get this right.
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Could someone explain the difference between aggregated and consolidated accounting information?
Aggregated simply adds up multiple sets of accounts and does not take out trading between them and so it overstates actual trade
Consolidated removes the intra-group trade within the jurisdiction
Thanks!
Barbara? Janet, I think
Too early!
….. but actually it is a female Richie Benaud! Someone pointed out a resemblance to me and I just can’t get it out of my head.
🙂
Hi Richard,
Could you help me understand what you mean’t by the “literally made up and never paid” in the statement, “ Deferred tax has to be ignored. It is quite literally made up and is, of course, never paid.
Thanks,
Robin
Deferred tax is simply an accounting entry
There is no such tax
Because the accounting entry is made does not mean that tax is necessarily ever due. It us only potentially due. When is not specified. It has no meaning in the context being discussed as a result . Frankly, it is a means for accountants to hide underpayment by their clients in a great many cases. In others it can create bogus assets. The rules make little sense
Hi Richard,
The is for your reply.
When you say, “The rules make little sense”, do you mean the rules in general for accounting for deferred taxation as specified in the accounting standards i.e. IFRS, FRS etc?
Can you give a simple practical example?
Much appreciated,
Robin
Easy
Why require that even the remotest risk of a liability be accrued when no there is no likelihood it will be paid?
That is not true of contingent liabilities
So why deferred tax?
Hi Richard,
Many thanks for taking the time to reply.
Something is not fully clear to me from your replies.
Are you saying that the whole concept of deferred tax is a bad idea, or just some of the current accounting rules within it?
Going back to my university days of business studies with some accounting, I thought the concept of deferred tax arose from timing differences between when a transaction is recorded in the accounts vs. the tax return, and the deferral entry brought your rate back to the headline statutory rate otherwise you could end up with a stranger looking effective tax rate.
Thanks,
Robin
I think deferred tax should reflect likely liabilities
It does not
It reflects full provisioning
That is why it is wrong and a sham
On another note. Richard have you watched or heard of Devils. It’s being screened on Sky Now TV and is an excellent series- supposed fictional but seems to be quite near the truth. Love to know your take ’
I don’t have Sky….
I’m a little puzzled. Notwithstanding your idea from 2008, Richard, a global minimum tax has been the core of the OECD’s Pillar Two framework on the taxation of the digitalised economy since at least October 2020. But now, all of a sudden, just because the US has decided to say something about it, it’s greeted as a new idea. I’m not anti-America by any stretch and I appreciate most are not following the OECD talks closely, but it’s not a new idea.
Agreed
You are right
It’s not a new idea. But now it’s a viable one
A blog is coming
Why use profit as a base?
It can be easily shifted and manipulated.
Why not have a global minimum turnover tax rate (say 2%) and link taxation to genuine economic activity in each country.
Biden’s proposal to use “book” income could result in nil corporate tax for heavily indebted companies who otherwise make significant sales in a country.
If the goal is to have a global minimum tax comparable across countries, using the top line base of sales seems the only sensible solution.
It is global apportioned profit being used as a base