On October 12th, the OECD released Blueprints for two proposals (extending taxing jurisdiction and a global minimum tax) to address the increasing digitalization of the global economy and remaining base erosion and profit shifting (BEPS) issues. In addition, the OECD released its economic impact assessment of the two proposals with sensitivity analyses.
Kudos are deserved by the OECD team responsible for producing the economic impact assessment. The report represents extensive and high-quality work. Although significant data limitations will always confront global tax policy analyses, the use of multiple data sources and their careful configuration makes the analysis less subject to a BAD (best available data) critique.
Without final details on the two proposals (“pillars”), the analysis presents a range of fiscal and economic estimates which should be helpful to policymakers in their future deliberations on these issues. The proposals could increase annual global revenues (excluding the U.S.) by $50-80 billion, or roughly 3% of global tax revenues. The effect on MNEs’ global investments would be modest, overall less than -0.1% of GDP, while the investment effects of a potential trade war due to unilateral digital services taxes could reduce global investment by over -1.0% of GDP.
The results are presented by high, middle and low-income jurisdiction groups, plus investment hubs (jurisdictions whose inward foreign direct investment exceeds 150% of their GDP). The analysis shows that the revenue gains come at the expense of investment hubs (or tax havens). While global investment effects would be modest, individual countries, particularly investment hubs, would experience both revenue and investment losses, particularly from the global alternative minimum tax preventing zero or low effective tax rates of the largest MNEs.
Although the OECD staff have the underlying data and analysis for individual jurisdictions, some Inclusive Framework countries did not want the data or analysis for their jurisdictions to be presented. The OECD staff provided individual countries with toolkits to do their own sensitivity analyses of the fiscal and economic effects and requested input from countries on the potential effects of the proposals on their economies, yet some countries still did not want individual country results or data to be transparent.
Estimates of the fiscal and economic effects for 200 individual countries would be subject to much greater uncertainty than the jurisdictional groups’ averages. However, transparency of the underlying data for other analysts to build on, both for analysis of the two digitalization tax proposals but also other global policy proposals affecting MNEs, could be very beneficial for better policymaking. Countries concerned about the OECD estimates, even with confidence ranges, for their countries should provide their policymakers with their own estimates of the effects of the proposals, and the differing estimates could be critiqued.
It is unfortunate that some countries in the Inclusive Framework are preventing greater transparency of analytical results and underlying data. Similar limitations have occurred with even the aggregated results of the Country-by-Country Reporting by the largest MNEs.
The OECD estimates assume that the US’ Global Intangible Low Taxed Income (GILTI) minimum tax regime, enacted in 2017, would “co-exist” with the global Pillar 2 minimum tax. This is an important assumption in terms of the fiscal and investment effects, since the GILTI minimum tax rate is calculated on a global basis, while the OECD/G20 Pillar 2 minimum tax rate would be applied on a country-by-country (jurisdiction, rather than global, blending) basis. Shifting income to low-tax rate jurisdictions would still be desired by US MNEs to offset tax on income subject to higher tax rates, reducing some of the potential anti-BEPS behaviors of US MNEs. Although the OECD reports empirical evidence that highly profitable MNEs are less tax sensitive than less profitable MNEs with respect to their global investments, their sensitivity to tax rate differentials across countries and into tax havens is significantly stronger.
Overall, the new economic impact assessment presents important fiscal and economic results to global policymakers and provides a foundation from which additional sensitivity analysis can be performed as the G20 and OECD work toward a global consensus. Progress on a new international tax system and additional economic assessments for individual countries will hopefully be forthcoming in the first half of 2021.
Tom Neubig