Mining Off OECD Global Tax Agenda
Mining and energy companies will be exempt from an international tax crackdown being led by the Organisation for Economic Co-operation and Development (OECD), reducing the risk of potential disincentives for new investment and shoring up Australia’s tax base.
Global efforts to better tax multinational businesses regained momentum last week, after US Treasury secretary Janet Yellen called for a global minimum tax on big companies. The move – as well as US efforts to increase its federal corporate tax rate from 21 per cent to 28 per cent – will make Australia’s 30 per cent company rate relatively more competitive.
The Trump administration had pulled back from international tax negotiations in the lead up to the US presidential election last November.
The proposed multilateral rules are intended to limit tax avoidance and profit shifting. Targets include digital giants Facebook and Google, large consumer-facing businesses with intellectual property in low-tax jurisdictions and other top- 100 multinationals.
The OECD has proposed carving out oil, gas and mineral extraction industries, in part to secure support of African countries, and the exemption is expected to be supported by the Biden administration, sources close to the negotiations say.
Australian-listed miners BHP and Rio Tinto will be exempt.
Unfinished business
The Coalition government lobbied foreign counterparts for the exemption for mining and energy, amid warnings about unintended consequences, such as the risk that big miners could pay more corporate tax in markets where the products including iron ore are sold than where the resources are extracted.
The OECD’s international tax project, which began in 2013, has two unfinished pieces of business that together could raise up to an estimated extra US$100 billion (FJ$206bn) for governments.
Pillar 1 aims to allocate government taxing rights on companies that have a limited physical presence in particular countries, but have large amounts of consumers or users, such as Facebook and Google.
The US had lobbied to extend the target beyond its digital companies to include big consumer-facing brands such as Johnson & Johnson, Procter & Gamble, luxury goods company LVMH, beverage and tobacco giants and auto makers.
The Biden administration now wants this extended to the largest 100 multinational companies.
Pillar 2 of the project aims to introduce a global minimum tax, which could raise an estimated US$50 billion (FJ$103bn) -US$60 bn (FJ$124bn) extra for governments.
The Biden administration also plans to increase its existing domestic “Global Intangible Low Tax Income” to 21 per cent, though it is facing Republican resistance in Congress. Internationally, a global minimum tax of less than 15 per cent is considered achievable, according to sources familiar with the negotiations.
The OECD and G20 governments are aiming to reach agreement by mid-2021, after last year’s deadline slipped.
Treasurer Josh Frydenberg said his discussions with G20 counterparts last week were constructive and governments were “cautiously optimistic” on striking a global deal. Jones Day partner Niv Tadmore said the Biden proposal matched the OECD’s international tax philosophy.
“This means that broad consensus is likely and that the global tax landscape would look very different in, say, 2025,” he said.
“The impact on USA investments in Australia may not be as material as might appear at first glance.
“True, the proposal aims at encouraging more local investment in the USA.
“However, given that the Australian corporate tax rate will continue to be higher than that of the USA, USA multinationals would continue to invest in Australia for the same commercial reasons they have invested here for many years.
“I think that Australian companies will continue to invest in the USA as part of their growth plans.
“The Australian tax system strongly discourages tax-driven decisions and this is well-registered in corporate Australia.”
Dr Tadmore said any move that saw BHP or Rio Tinto paying more tax, including in China, would eat into Australia’s tax base.
Quick shift
Deloitte tax partner David Watkins said the US had quickly shifted from being the excuse as to why the OECD process might fail to the reason why it might succeed.
“There is still a long way to go but it looks like the OECD bus is back on the track and gathering speed in 2021,” he said.
“Based on media reports, it seems that the US now accepts the pillar 1 argument that the largest and most profitable multinationals should be subjected to a new tax in the markets into which they sell.
“The US proposal could apply to as few as 100 companies, including US and non-US companies, tech and non-tech companies.” Mr Watkins said reporting suggested while the US pillar 1 proposal was likely a narrower scope than the OECD is contemplating, the more significant tax collections are in pillar 2. “From a political perspective, the goal is to deliver both pillars, and to do so will require compromise,” he said.
“The US positioning improves the prospects of the two pillars remaining a combined package agreed on a multilateral basis.”
He said convincing countries including France, Austria and Spain to abandon unilateral digital services tax plans was among key challenges.
KPMG tax partner Grant Wardell-Johnson said the July 2021 timetable could be achieved, a potentially “remarkable” outcome for two reasons.
“The first is how rare international agreements involving multiple perspectives of country-interest are actually reached in our global history. The OECD’s initiative involves 135 countries,” he said.
“The second reason is that this is likely to set the international tax rules for many decades to come. It is a turning point in tax history. “Ultimately, what this means – and this is true for Australia as much as other countries – is that it is very important that we get it right. I believe we will.”
The first is how rare international agreements involving multiple perspectives of country-interest are actually reached in our global history. The OECD’s initiative involves 135 countries. Grant Wardell-Johnson KPMG tax partner