Tax and Legal News - April 2024

The accelerating train of international taxation

I’m surprised at the speed of the global implementation of some tax rules. I mean, it’s faster than I ever thought – a sentence I never thought I’d hear myself say.

I’ve always taken the G8, G20, OECD and EU proposals with a grain of salt, never really believing the current generation would see major change in their professional lives. I’ve been reassured by the major project to unify the rules for calculating the income tax base (the so-called CCCTB), which the European Commission first promised to propose by the end of 2008. We’re about to celebrate our 20^th anniversary and implementation is not imminent. And that’s just a legislation for the EU without complex discussions with the US, Asia, etc..

Then BEPS (Base Erosion and Profit Shifting) arrived and something broke. When the first action plan was published in 2013, I found it unlikely that items like interest deductibility limitations, CFCs and hybrid mismatches would be quickly implemented into domestic legislation. But in 2016, the EU issued ATAD (the Anti-Tax Avoidance Directive) and all Member States implemented it in 2019. The BEPS action point to amend all double tax treaties looked like something out of a fairy tale. There are reportedly over 3,000 such bilateral treaties, the work for half a century. But then came the multilateral instrument (MLI), which would essentially amend all the treaties at one go. By 2016, more than 100 countries had joined and by 2019 it was in effect. In 2013, we started DAC 1 with a basic information exchange and last year we approved DAC 8 for the reporting of crypto assets.

BEPS 2.0 further increases the pace with two pillars. In 2021, more than 140 countries joined pillar two – a minimum corporate taxation of 15%. There are massively complicated rules on how to calculate that 15% and who in a group should actually pay (so there’d be no escape through the few countries that hadn’t joined). And in 2024, we have 30 countries that have implemented it, including the Czech Republic.

What comes next and how fast? I would guess we start with the rich (however defined). In his low-key speech at the recent G20 ministerial meeting in Sao Paolo, Professor Gabriel Zucman’s said wealthy individuals should systemically pay a progressive tax. Most tax systems are nominally set up that way. However, the reality captured in the Global Tax Evasion Report 2024 shows that while this is true for most taxpayers, it suddenly breaks down for the truly wealthy, whose effective taxation is regressive. The higher the income, the lower the rate. The reason, according to the professor, is obvious. They have enough resources and motivation to create structures to minimize the tax burden.

The professor therefore proposes an analogy to pillar two for individuals. Let’s set a minimum tax that an individual must pay. According to the professor, it’s obvious that really wealthy individuals will have most of their assets in corporate structures and therefore most of their income will not be realized for individuals but within these corporate structures. That’s why we don’t set the minimum tax as a percentage of income (we wouldn’t collect anything), but as a percentage of assets. Illustratively, he states 2%. When I think of some of the people in the Forbes 500, paying 2% of the value of your assets every year as an individual is suddenly a pretty big number.

Arguments that these people will not have the liquidity to make such tax payments are rejected because, according to the professor, it is their own fault for hiding their income in corporate structures to avoid taxes. The estimated financial benefit of such taxation of billionaires is USD 250 billion annually. But the biggest benefit is said to be restoring public confidence in the fairness of the system.

How fast? Consider a few lines above how the speed of implementation grows exponentially and maybe we can guess – a few years (literally)? Pure speculation.