A group of 24 emerging economies and developing countries have strongly criticized the current plans of the OECD, the Organization of Industrialized Countries, for a new global tax system. This is evident from documents that the OECD has on its website published.
The new international tax rules, which the OECD hopes to introduce from 2024, are intended to prevent tax avoidance by multinationals. Developing countries in particular should benefit from this, as companies would then pay more tax in the countries in which they operate, rather than divert profits to a tax haven. According to the OECD, the plans will generate an additional €125 billion in tax revenue worldwide.
But the countries of the so-called G24 – which include India, Brazil, South Africa, Mexico and Argentina – fear that they will be worse off under the new rules. In the view they sent to the OECD earlier this month, they call it “very worrying” that individual countries will soon no longer be able to levy so-called withholding taxes on dividends, royalties and interest that multinationals send abroad.
It should be replaced by a system whereby multinationals will pay a higher profit tax per country. But according to the G24, this amounts to “erosion of existing tax rights” and the measure is “unappealing and pointless for developing countries” because it would generate no additional revenue on balance. That individual countries are no longer allowed to impose a separate tax on tech companies such as Facebook and Google under the new plans – a so-called digital services tax – the developing countries call a ‘limitation of the powers of sovereign jurisdictions’.
Notable Criticism
The group’s criticism is remarkable: in October last year 18 of the 24 countries voted in favor of plans to tax multinationals worldwide more. In total, the OECD plans were supported by 136 countries. The joint approach must end the existing labyrinth of national tax rules and international treaties. A worldwide minimum rate of 15 percent corporate income tax should also prevent the shift of profits to tax havens. Concerned government leaders spoke of a “historic” agreement.
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Harmen van Dam, tax expert at law firm Loyens & Loeff, understands the criticism from developing countries. “They anticipate that the new system will be particularly beneficial for the richer countries. The new rules also affect a maximum of five hundred companies [multinationals met een omzet van twintig miljard euro of meer]. They will soon have to set up new, complex systems of taxation for this relatively small group. It is very doubtful whether that is worth the investment.”
A total of 71 interested parties submitted an ‘opinion’ to the OECD this summer. During a meeting in Paris on September 12, all parties will have the opportunity to explain these in more detail. The business community is also critical of the current plans, according to the documents. For example, large tech companies such as Apple and Google fear double taxation: at local subsidiaries in various countries and at the global parent company. Many multinationals also call the plans too complex, because they have to keep a lot more data per country. Unilever, Microsoft and Nestlé, among others, expressed objections to that effect.
Companies are looking for predictability and efficiency, but are now faced with unclear legislation that they cannot possibly comply with
“Companies are looking for predictability and efficiency, but are now faced with unclear legislation that they cannot possibly comply with,” says Van Dam. It is not yet clear, according to him, how exactly companies will have to calculate their profit per country. This applies, for example, to manufacturers of products with parts from different countries, such as cars, he says. “Companies have many questions: do we need to set up a new accounting system for this?”
Initially, the intention was to introduce the new tax system by 2023, but OECD Secretary-General Mathias Cormann made announced earlier this year that it will be a year later. This is partly due to resistance within the European Union, where Hungary has so far blocked the plans. Poland did the same before. It is also uncertain whether the US Congress will fully support the plans.
Paul Tang (PvdA), chairman of the tax committee in the European Parliament, is nevertheless optimistic: “Introduction from 2024 is feasible. The fact that US President Biden recently included the minimum rate of 15 percent in his climate law was an important step. That helps enormously to get European countries that may still have doubts, such as Ireland and Malta, on board. The ultimate goal is certainly still in sight.”