A few months ago, the Philippines joined the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) as a member in a move to reaffirm its commitments in upholding tax fairness and combating tax avoidance schemes.
So, what does this Inclusive Framework on BEPS entail?
All in all, there are 15 actions set out under the framework, each seeking to address a particular issue related to tax avoidance. For instance, the first action outlined under the framework is “Tax Challenges Arising from Digitalization.”
In our previous column*, we discussed how the digitalization of the economy brought with it several problems when it comes to taxation. Specifically, it allowed large tech companies to be able to evade their tax obligations by hiding their income in tax havens. The scope of this issue necessitates the reliance on a global approach.
To address this issue, the Organization for Economic Cooperation and Development (OECD) has developed the Two-Pillar Solution.
The first pillar concerns itself with the determination of the taxation nexus and the tax base for large multi-national companies (MNCs). The second pillar concerns itself with the establishment of a global minimum corporate tax rate for MNCs. These two pillars ensure that MNCs would no longer be able to hide their income away in countries which impose practically zero taxes.
The Two-Pillar Solution, however, has its pros and cons.
The main advantage of the Two-Pillar Solution is that it can address the issue of excessive tax avoidance or, the worse version, tax evasion. It would ensure that the corporations would be liable for taxes in the countries that they are operating in. By the OECD’s own updated estimate, the Two-Pillar Solution would result in an annual global revenue gain of $220 billion (as opposed to their previous estimate of $150 billion) for Pillar Two, and up to $36 billion for Pillar One.
This also addresses the issue of how to tax tech companies since, given the scope of their operations, there have been difficulties in imposing taxes on them.
Another advantage is that it would lead to a fairer distribution of tax rights. Due to the way MNCs operate, it is possible for them to produce parts of a product in Country A, manufacture the product in Country B, and sell the product in Country C. By laying down rules on how to determine the applicable tax jurisdiction, the Two-Pillar Solution ensures that the company won’t just get to pick to get taxed at the country with the lowest tax rates.
However, as noted above, it has its disadvantages as well.
A major criticism against the Two-Pillar Solution or, specifically, the imposition of the global minimum tax is that it can be disadvantageous to developing countries.
Given the choice of investing in a developed country and a developing country, it is not difficult to guess that a corporation would rather invest in a developed country, especially given the likelihood of already established institutions, infrastructure, and technology. One of the ways that developing countries can become a viable investment option is by offering lower tax rates or offering tax incentives.
The imposition of the global minimum tax affects that option for developing countries. They would have to comply with the minimum rates.
For instance, in the Philippines, the present corporate income tax rate is, generally, 25%. At first glance, the imposition of a global minimum tax of 15% would not affect the Philippines since the present tax rate is already above 15%. However, the Philippines also grants tax incentives such as income tax holidays, tax exemptions, and enhanced deductions.
In other words, the global minimum income tax would affect the power of a developing country to offer incentives or to lower its tax rates as a way of attracting foreign investment.
Another criticism against the Two-Pillar Solution is that it is complex and would actually add to taxpayers’ compliance burden. Tax solutions that increase the compliance burden would be counterproductive as they could increase non-compliance arising from such complexity and would not be beneficial for countries, given the trend of simplifying tax systems all over the world.
Finally, another criticism is the narrowness of its scope. Pillar One covers only MNCs with €20 billion in annual revenue, while Pillar Two only applies to MNCs with €750 million in annual revenues. Converted to the Philippine Peso, this would equate to P1.3 trillion in the case of Pillar One, and P45 billion in the case of Pillar Two.
Despite these flaws, something must be done. At the present, MNCs are able to get away with not paying taxes. In the Philippines, while tech companies generate millions of dollars, they have paid zero in taxes to the Bureau of Internal Revenue.
Still, any proposal that seeks to adopt the OECD’s Two-Pillar Solution must consider these advantages and disadvantages. On Feb. 27, tax experts and representatives from international organizations, including the OECD, will be attending the 2024 International Tax and Investment Conference, organized by the Asian Consulting Group, a tax advisory firm based in Quezon City, to discuss the various tax initiatives and proposals that could address various issues, especially in the Digital Economy. Among the topics to be covered during the conference is the OECD’s Two-Pillar Solution. For more information, about the conference, visit www.acg.ph or e-mail <mon@acg.ph>.
*Finding solutions to economic and tax issues — BusinessWorld Online (https://tinyurl.com/ysgl7zsr)
This article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or MAP.
Raymond “Mon” A. Abrea is an MPA/mason fellow at the Harvard Kennedy School. He is a member of the MAP Tax Committee and the MAP Ease of Doing Business Committee, co-chair of Paying Taxes on Ease of Doing Business Task Force, and chief tax advisor of the Asian Consulting Group.
