Global Minimum Tax: Implications and Opportunities for Tax Authorities Leveraging Technology

In recent years, governments, policymakers, and the public have become increasingly concerned about the impact of multinational corporation tax evasion. Many multinational corporations employ sophisticated tax planning strategies to shift profits to low-tax jurisdictions, to avoid paying taxes in the countries that they operate in. This practice has cost governments significant revenue and has raised concerns about the fairness of the international tax system. The Organization for Economic Cooperation and Development (OECD) has proposed two reform pillars, one of which is the Global Minimum Tax (GMT), to address concerns. 

What exactly is the Global Minimum Tax (GMT)? 

The GMT is intended to ensure that multinational corporations pay a minimum tax regardless of where they operate. This will help prevent corporations from shifting profits to low-tax jurisdictions, lowering their tax liabilities. The proposed tax rate is 15%, the bare minimum required to prevent profit shifting. 

The GMT is part of a larger tax reform package proposed by the OECD to modernize the international tax system. The proposed reforms of the OECD are divided into two pillars: Pillar One and Pillar Two. 

What is Pillar Two? 

Pillar Two of the OECD's proposed tax reforms is aimed at addressing the issue of base erosion and profit shifting (BEPS). BEPS refers to the practice of multinational corporations shifting profits to low-tax jurisdictions to reduce tax liabilities. The pillar proposes a set of rules to enable countries to tax profits that have been shifted to low-tax jurisdictions, regardless of where the company is based. 

This pillar is the introduction of a new tax rule called the ‘Income Inclusion Rule’. Under this rule, if a multinational corporation makes a payment to an associated enterprise in a low-tax jurisdiction, the payment will be subject to tax in the country where the parent company is based, regardless of whether the payment is deductible in the low-tax jurisdiction. 

The second pillar  is designed to prevent multinational corporations from shifting profits to low-tax jurisdictions by denying a tax deduction for payments made to affiliates in those jurisdictions. The rule will apply to a range of payments, including interest, royalties, and service fees 

Why are the two pillars so important? 

The GMT and OECD Pillar Two are important for key reasons listed below: 

1. Global Anti-Base Erosion Model Rules (GloBE): These rules are a part of OECD’s Global Anti-Base Erosion Model Rules aiming to ensure that multinational corporations pay a minimum level of tax, regardless of where they operate. This would help to prevent companies from shifting their profits to low-tax jurisdictions, thereby reducing their tax liabilities. 
   
   
2. Public trust in international tax system: These implementations have been proposed to address concerns around tax avoidance and restore public trust in the international tax system by making it fairer and more transparent. The current system allows multinational corporations to shift profits to countries with lower tax rates, resulting in billions of dollars in lost revenue for countries around the world. This has contributed to a perception that the international tax system is unfair and lacks transparency. 
   
   By setting a minimum tax rate for corporations and introducing rules for the taxation of profits in countries where they are earned, the pillars will help prevent profit-shifting and ensure that corporations pay their fair share of taxes.  
   
3. Boost developing countries: These measures will have a significant impact on developing countries that often struggle to compete with larger economies for investment. By creating a level playing field for businesses of all sizes, the GM T and OECD Pillar Two could help to promote economic growth and reduce inequality, further enhancing the potential to restore public trust in the international tax system. 
   
4. Effective utilization of tax revenue: The new approach will help raise much-needed revenue for governments. The revenue could be used to fund public services and address social inequality, which is a major economic issue in many societies. By utilizing the funds generated from such measures, governments can address problems related to poverty, education, healthcare, and infrastructure, which would contribute to the overall development and well-being of communities.  

The role of technology to address the GMT 

Tax technology can be considered an integral component of the proposed changes. With the implementation of these reforms, tax authorities will need to identify and track multinational corporation profits and payments across multiple jurisdictions. This will require sophisticated technology and tools, including data analytics, artificial intelligence, and machine learning. 

Tax technology can help tax authorities identify and track the relevant eligible transactions by automating data collection and analysis. For example, tax authorities can use data analytics tools to identify patterns of profit shifting and transfer pricing manipulation. They can also use artificial intelligence and machine learning algorithms to analyze large amounts of data and identify potential tax evasion.  

Tax technology will also provide greater transparency and consistency in reporting, which is crucial in detecting companies not paying their fair share of taxes, And consequently, enabling countries to take appropriate action against such companies. Automated tax calculations and real-time reporting can help monitor and enforce compliance, thereby creating a level playing field for businesses operating in different countries. 

How tax authorities can deal with the GMT using technology 

Tax technology is a valuable tool for tax authorities dealing with GMTs in several ways, including: 

1. Data collection and analysis: Tax authorities can gather and scrutinize data from diverse sources such as financial institutions, multinational corporations, and other tax authorities. This data enables the identification of companies that must adhere to GMT and confirms their adherence to relevant regulations. Technology facilitates better compliance by identifying discrepancies in reporting and inconsistencies in data, leading to efficient identification of tax evasion, which can reduce the amount of lost revenue. 
   
   
2. Ensuring global compliances: Tax authorities can oversee adherence to GMT regulations. This encompasses monitoring financial transactions, detecting abnormalities, and spotting potential tax evasion. Such technology facilitates effective monitoring, making it easier to identify discrepancies and inconsistencies in reporting, thus reducing tax evasion. 
   
   
3. Risk determination and profiling: Through the analysis of a company's financial activities and comparing them with industry benchmarks, tax authorities can evaluate the likelihood of non-compliance and ensure the collection of the appropriate amount of taxes.
     
   
4. Benchmarking processes: Streamline tax-related tasks, such as data collection, analysis, and compliance monitoring. By automating processes, tax authorities can increase efficiency and effectiveness in dealing with GMTs. Technology allows authorities to focus on high-risk cases, while low-risk cases are handled by automated processes. As a result, tax authorities can save time and resources while ensuring that the appropriate amount of tax is collected. 
   
   
5. International cooperation: Tax technology can enhance international cooperation among tax authorities by enabling the secure and efficient exchange of data and information. This fosters consistency in the application of GMTs across diverse jurisdictions. Technology enables tax authorities to communicate seamlessly, promoting a collaborative approach in identifying and addressing potential tax evasion. Through effective international cooperation, tax authorities can achieve higher levels of compliance with GMT regulations. 

Conclusion 

The proposed Global Minimum Tax and OECD Pillar 2 reforms will necessitate the use of sophisticated tax technology such as data analytics, artificial intelligence, and machine learning. These tools will assist tax authorities in identifying and tracking multinational corporation profits and payments across jurisdictions, allowing them to detect potential tax evasion, profit shifting, and transfer pricing manipulation. Tax technology will increase transparency and consistency in reporting, allowing countries to take appropriate action against companies that do not pay their share of taxes. Furthermore, automated tax calculations and real-time reporting can assist in monitoring and enforcing compliance with the GMT, creating a level playing field for businesses operating across borders. In conclusion, tax technology will play a crucial role in the successful implementation of these reforms and in ensuring fair taxation globally. 

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