OECD Tax Reform To Impact Only 78 Of 500 Largest Companies: Study
While the OECD/G-20 tax agreement announced on July 1 is an important reform, it is "only a tentative step in that direction," according to a study published by the Oxford University Centre for Business Taxation.
130 countries supported the OECD Inclusive Tax framework that outlines two reforms.
The first, to allocate a portion of the profit made by very large multinational enterprises to market countries — that is, countries they make sales in. This is referred to as Pillar One.
The second, a minimum 15% corporate tax rate, is Pillar Two.
Pillar One will impact only 78 of the world's 500 largest companies, wrote Martin Simmler and Michael P. Devereux in a blog accompanying the study. The total allocation of profits for these companies would be $87 billion, the blog said, assuming the lower end of the band in OECD's framework. The OECD has estimated that number to be over $100 billion each year but didn't mention number of companies.
Pillar One is to apply to companies with global turnover of above €20 billion ($24 billion) and a profitability above 10% (profit before tax/revenue). Between 20-30% of residual profit defined as profit in excess of 10% of revenue will be allocated to market jurisdictions.
The authors note the framework released on July 1 has a higher revenue threshold than the earlier version (€750 million), thereby narrowing the tax net. This higher revenue threshold was proposed by the U.S., they wrote.
Also, the focus on businesses that offer automated digital services or are consumer-facing was dropped. Financial services and extractive industry firms have been excluded from the scope of such taxation.
The use of pre-tax rate of return on revenue as a threshold, versus pre-tax return on equity, also reduced the scope.
As a result, the authors found,
Based on the agreed Pillar One threshold of profitability of 10%, only 78 of the world’s 500 largest companies will be affected.
If the proportion of profit above this threshold, liable to allocation, is set to 20% then the total allocation for these companies would be $87 billion.
Around 64% of this total ($56 billion) would be generated by the U.S.-headquartered companies.
Around 45% of this total ($39 billion) would be generated by technology companies, and around $28 billion would be generated from the largest five technology U.S. companies (Apple, Microsoft, Alphabet, Intel and Facebook).
Reducing the revenue threshold from $20 billion to €750 million (alongside Pillar Two) would double the aggregate profit to be allocated but would increase the number of companies affected by a factor of 13.
The sectoral composition of companies subject to Pillar One is strongly affected by the definition of profitability — pre-tax profits as a proportion of revenues. Among European firms with revenues above $20 billion, there are almost twice as many companies that have a return on equity above 10% compared to those that have a return on revenue above 10%.
"These results shed some light on the political compromise underlining the agreement on Pillar One," the authors concluded.