Has the OECD lost patience with its members?

Laurence Field, Partner, Corporate Tax

For the second time in the past few months, The Organisation for Economic Co-operation and Development (OECD) has published its own proposals to tax multinational companies. In a release issued in early November, it suggested that a global minimum rate of tax should be introduced and is now keen to receive feedback from interested parties by 2 December 2019.

Why introduce a global minimum tax rate?

The OECD believe that having a floor to the level of tax, will reduce the incentive for taxpayers to shift profits from high tax jurisdictions to low tax ones. Interestingly, it also stated that it hopes to reduce the incentive for tax competition between members.

No doubt, if countries can’t compete on taxation in order to attract business, they will likely turn to other areas such as, regulation or labour law. Whether this is the intention of the OECD seems unlikely, but it could be an unintended consequence of a minimum tax rate.

It’s interesting that the OECD specifically describes a ‘race to the bottom with corporate taxes’ as harmful, whereas others may argue low taxes is a way of stimulating economic development. This puts the OECD firmly in the camp of higher overall taxation, and could put it at odds with some of its more influential members.

Tax rate doesn’t matter

As every business knows, the rate of tax isn’t that important when determining how much tax is paid – it’s the tax base that matters. If the law allows no deductions against income earned, the tax paid is a lot higher than if a deduction is allowed for all the expenses of generating that income. Different countries have different tax systems – typically looking to highly tax industries it wants to discourage (or those that aren’t mobile enough to get away) and providing tax breaks to those it approves (in the UK, typically those deemed to be businesses of the future). Without a common tax base, any proposals to have a global minimum rate of tax, are effectively meaningless.

To make compliance easier and to allow tax authorities to administer such a system, there is a proposal to use the financial accounts to determine taxable income. To UK ears that doesn’t seem too controversial, however, which accounting standards should be used? Local GAAP, IFRS, the GAAP of the parent company, the GAAP of the consolidated statements? What if the parent company is situated in a country that doesn’t require financial statements to be published?

Break out the popcorn

If the financial statements are the starting point, it would be too easy for the OECD to say the profits calculated under (an appropriate) GAAP should then be used for the global minimum tax. Recognising that most tax systems have a series of adjustments, there would be a significant mismatch between the financial statements profits and the taxable profits in each territory. Therefore, it will be necessary to calculate a series of (to be) agreed upon adjustments to the starting point. For example, different systems deal with interest, governments grants, tax credits, brought forward losses, sales by instalments, entertainment, tax depreciation and fines (to name but a few) in different ways. Getting agreement between nation states on this should be entertaining, given that the nation states will want to ensure that large taxpayers have no incentive to move elsewhere. If tax is no longer an important factor to attract business – if there are any enterprising politicians left, they will have to think up other ways to attract business to their countries.


Business is not predictable, companies have good years and bad years, and subsidiaries sometimes make losses. Should the minimum tax apply year on year, without reference to past and future years? Should it be designed to ensure a minimum over time? In which case, if more than the minimum is paid it one, can some of the surplus be carried forward to later years, when there might be a deficit?

There’s a balance to be struck here between simplicity, fairness, practicality, record keeping requirements, information exchange between tax authorities and the objectives of the tax. Remember that individual countries would still be calculating local taxes and so adjustments arising from tax audits (sometimes years after the event) would need to be factored into the minimum rate of tax.


Most countries have their own laws to make large multinational companies provide more detail, so that their tax affairs can be investigated more closely. The interaction of these proposals with existing thresholds will need to be carefully considered, to ensure that compliance is proportionate to the economic activity it is trying to tax. There is a good case for de minimis tests – for example if there are only small profits arising in low tax jurisdictions, should the enterprise have to keep full calculations to demonstrate it is paying an appropriate level of tax on an international basis? The challenge with carve outs and thresholds is that they tend to have a cliffs edge result, a business is either in or out of the rules and those operating close to the thresholds can experience real volatility.

binoculars over sea

What next?

Politicians will be scrambling to determine their position on these complex proposals. Within a day of their release the Irish finance minister indicated he was wary of the global minimum tax and warned that the Ireland must start spending less and saving more before the tax take falls. Being realistic, there is an incentive for those countries that could lose out, to delay the introduction of the proposals for as long as possible, while the winners may want to proceed as soon as possible. The OECD is a member organisation and the speed at which these ideas move forward will be dependent on politics - over which the average taxpayer has little influence.

However, those with opinions on the proposals have until 2 December to respond. These ideas would be a fundamental change to the global tax system and change often has unintended consequences. If you foresee any difficulties, you have a few weeks to let the OECD know, through At least that way, you can always say you told them so.

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Laurence Field
Laurence Field
Partner, Corporate Tax