The last decade has seen a historically significant increase in tax compliance measures. With the intensification of digital globalisation and the ease with which cross-border and multi-jurisdictional transactions occur in business, these measures have been implemented by international and national regulatory bodies. Via a range of international instruments and domestic measures respectively. Therefore, the international tax compliance landscape has become progressively complicated and is often unclear for jurisdictions like The Bahamas. Consequently, this is a direct result of the proliferation in domestic and international measures and in some cases with extraterritorial applications, such as FATCA, CRS and The Beneficial Owner’s Registry just to name a few. Accordingly, these measures mandate those enterprises with a multinational presence, must comply with such varying measures across the multi-jurisdictional countries in which they operate.
Further on during June 2021, the meeting of G7 Finance Ministers and Central Bank Governors of the G7 unanimously reached an agreement on international tax reform, stipulating that all multinational companies shall pay a minimum tax rate of 15 % in each country where they operate. The G7 comprises Canada, France, Germany, Italy, Japan, the UK and the US. For numerous years debates internationally and at OECD-level on the possible reform of the international business tax regime has ensued encompassing, two main policy objectives respectively. They have been affectionally coined “The Pillar One & The Pillar Two Objectives”. The Pillar One discussions focus on amending the nexus and profit allocation rules to make multinational groups, that operate digitally to pay taxes in jurisdictions where their customers are located, rather than where their headquarters are.
Pillar Two on the other hand aims to agree a global minimum business tax rate. Ultimately circumventing the “race to the bottom of the master of the tax lows.” Where countries indecorously undercut each other’s tax rates in a bid to attract large companies to make their jurisdiction their home base. Lastly the global rate proposed by Pillar Two, would also circumvent tax avoidance techniques that seek to exploit the differences between countries tax systems. Further the profit allocation rules agreed by the G7, shall apply to global firms with at least a 10 % profit margin. This deal empowers countriesto tax 20 % of the profits of “the largest and most profitable multinational enterprises,” that has ascertained profit margins of at least 10%. Therefore 20% of any profits made above the 10 % margin of the company’s profits, shall automatically be confiscated from the jurisdiction of domicile and taxed in the jurisdiction where they operate respectively.
Moreover, Pillar Two is the gift that just keeps giving, it also contains an enforcement mechanism. This arsenal is activated for jurisdictions that decide not to sign up to the minimum tax rate agreement. They subsequently fall “under the minimum tax payment rule”. Therefore, pressure is then levied on those countries to either comply with the corporate minimum tax, or contribute via the direct income of companies, domiciled, headquartered and currently making profits in those jurisdictions.
It is undeniable that this deal is an immense step forward, in the solidification of the global tax system technical fitness for the new global digital age. However, many challenges remain ahead, they encompass the responsibility of the G7 group of countries to “sell, hook, line and sinker” this very notion of this “15% corporate minimum tax” to the finance ministers of the G20 nations next month in Italy. Lastly on those premises the final deal must also be signed and finalized by the G20 leaders when they reconvene in October 2021 respectively.
Historically this all come upon the very heels of those inevitable tax compliance measures gripping the world globally. With no abatement in view, as previously stated in Her Majesty’s Revenue and Custom’s (hereinafter referred to as “HMRC”), recently published strategy for offshore tax compliance “No Safe Havens 2019”. This stipulated that since 2010 UK government has introduced over 100 new measures to tackle tax non-compliance. On these premises all of the aforementioned measures aggregated with other unilateral ones by various countries, combined with others introduced via international instruments, unequivocally creates a complex and often indeterminate international tax compliance landscape.
Additionally, when Great Britain ascertained the presidency of the G8 in 2013, they made it abundantly clear that “tax compliance” would be indisputably one of its “core priorities”. This elite group congregates the world’s most powerful and influential leaders of developed economic countries, to discuss global issues and identify action plans to remedy the same. Upon close analysis, it is undeniably evident that the UK’s approach forms part of a much more comprehensive co-ordinated campaign that shall no doubt result in the transformation of all global tax structures respectively.
Consequently the “solitary stroke application” of the wider approach by the US, the UK and countless other G8 countries (now the G7 countries after Russia’s expulsion in 2014), aim to ultimately end the practice whereby multinational companies and/or individuals transfer their assets anonymously between jurisdictions to lessen and/or evade the payment of taxes in the countries in which they make their profits. These figuratively coined “tax havens” have been placed on a list of annihilation. The fear is that the tax base of all countries is rapidly being eroded by wealthy individuals who are accumulating capital in low tax environments like The Bahamas. Similarly, the same tactic is being exacted by multinational companies misrepresenting the competition. Therefore, paying less and less tax by engaging in arbitrage between competing tax jurisdictions.
In recent years it has become evident that national tax laws have not kept stride with globalisation. Consequently, most governments have become concerned about the diminution of the national tax base of governments that necessitates such revenue to deliver essential services for its citizens such as education, health care and policing respectively. This concern was one of the many factors that led to the developments at the meeting of G20 finance ministers in Moscow 19th July, 2019. Further in similar meetings like that and this all accumulated with the meeting of G7 Finance Ministers and Central Bank Governors of the G7, unanimously reaching an agreement on international tax reform. Consequently, stipulating that all multinational companies shall pay a minimum tax rate of 15 % in each country where they operate. Many developing and progressive developing nations have decided to collaborate with each other, to address aggressive tax avoidance by the aforementioned residents respectively.
As a result of the same, the G20 asked the Organisation for Economic Co-operation and Development, (hereinafter referred to “the OECD”) to assimilate an action plan to devise how governments might ascertain the tax revenue they require on a global basis, while permitting businesses to invest and grow. The said report, now published, identifies fifteen specific actions proposed to circumvent corporations from paying meager or no taxes under the international double tax rules that historically proceeded from the 1920’s. It principally concentrates on the digital economy and its ability to empower goods and services to be provided in ways that do not fall within the traditional scope of any tax regime of any specific country respectively.
On these premises the OECD report recommends, that a new set of standards should be established to circumvent double non-taxation. Moreover, there should be more intricate international collaborative efforts so that said income does not disappear from the reach of tax authorities. Often times, this transpires by company’s calculating use of multiple deductions for the same expenditures but in different jurisdictions. Understandable, there is uncertainty around whether all governments shall be minded to emphatically agree, to make the necessary conciliations to execute the proposed plan of action. Nevertheless, the fact that numerous leading nations have fundamentally acceded to the universal principles involved, suggests that an imminent transformation in the way in which sovereign states tackle taxation and tax competition. Especially, when they are inherently faced with the fact that globalisation, offshore centres and digital insurgency are catalyst being used to facilitate innumerable sums of money, being moved around the world beyond their fiscal reach.
In this vein, it is projected that all the OECD members and G20 countries will assimilate their plans within the next two years respectively. We should be remised, if we did not acknowledge the fact that the process to implement this change shall be fraught with difficulty. Paved with the uncertainty, as to whether nations beyond the scope of the OECD and G20 can be persuaded to adopt these new revolutionary tax principles. The territories primed to feel the first pinch of these new waves of policies, are most likely to be the Overseas Territories in the Caribbean. Unfortunately, particularly the British Virgin Islands and the Cayman Islands who went to great lengths to legitimately, establish a quite sophisticated legal environment with the encouragement of government of the UK. This empowers low or no tax operations through a myriad of offshore financial vehicles. Undoubtedly, The Bahamas will not be too far behind and most likely will be forced to implement a “low tax” not a “no tax” regime, to fall in line with its other CARICOM nations to circumvent its continued blacklisting by the OECD respectively.
However, other autonomous nations in the region offering offshore financial services shall similarly not remain immune indefinitely, as it is predicted that they too shall follow suite in short order. These regions shall be forced to contemplate, how to beneficially align their offshore and onshore regimes to intrinsically acquiesce the OECD’s and G20’s current approach.
