Key Points Summary by Michelle Lee
A lot of governments’ financial health were hurt in the 2008 downturn and some still have not recovered yet to these days. In 2010, the governments started to realize large multinationals were not paying taxes to countries they conducted operations.
In the 1970s, multinationals were usually manufacturers, had physical presence and tangible goods. Their income could be easily traced and taxed by local and home countries.
In the digital economy, although multinationals earn income overseas, the essential operation such as infrastructure, strategic decision and major deal making are done in home countries. Their foreign subsidiaries’ income is service based and provided remotely, can easily be shifted to tax havens. These subsidiaries generate stateless income which is taxed by nobody.
The proposed worldwide tax agreement has two pillars.
- Countries will be entitled to income tax revenue on pro-rata basis. Some countries, such as India, have started to charge digital service tax on gross revenue. With this agreement, those countries will give up digital service tax in lieu of the pro-rata income tax.
- A minimum tax rate will be implemented. If the local countries do not participate, the home countries can charge the multinationals up to the minimum tax rate.
140 countries are interested in this inclusive framework proposed by OECD. If agreement reached, each country will put the guidance into its own tax laws. For the US, they have to be passed by the House and Senate.
Jeffery M. Kadet spent over 32 years in public accounting and 2 years in Finance, US Army. He was engaged extensively in the structuring of cross border transactions involving both U.S. and local country tax laws and initiated, managed, and grew several tax and legal practices. Over his career, he served numerous industries including financial and other services, telecommunications, oil and gas, natural resources, real estate and hospitality. Of his 32 years in public accounting, 22 years were spent living and practicing outside the U.S. in Hong Kong, Singapore, Tokyo, Moscow, Istanbul and Shanghai. From his first retirement in 2003, he has taught several international tax courses as an adjunct lecturer in the Tax LLM program at the University of Washington School of Law in Seattle, Washington. He has also authored numerous articles on various tax topics.