Implementation of global tax code will be the key, says Marna Ricker

Globally, 143 countries are negotiating for a new global tax code that aims to put a minimum rate of corporate income tax and eliminate the low and zero-tax regime. Marna Ricker, EY Global vice-chair (tax), in an interview with Krishna Kant in Mumbai, discusses the progress on the new tax code and its implications for companies and capital flows. Edited excerpts:

What has been the progress on worldwide negotiations to bring out a global minimum corporate income tax and zero or low-tax jurisdictions?
 

I would say the progress has been quite encouraging so far. The negotiations are part of a journey to modernise the global tax agenda, which had hitherto dealt with more traditional businesses to now cover new business models as well, including digital ones. They have been going on for more than two years but we are now in the final stages of this process. When it’s done, this will be one of the biggest changes in the tax landscape in more than a hundred years. It has been quite an effort to convince 143 countries, including the United States (US), to take part in this journey. The European Union has announced it will move this tax regime forward. We’ve also got countries like the United Kingdom (UK) that have implemented the new tax code. But then we will have to see what kind of steps other major countries are taking.
 

How will this affect the world’s leading multinationals, which earn most of their revenues and profits in North America and Western Europe but are headquartered in low-tax jurisdictions such as Ireland?
 

Under the new tax regime, every country has the opportunity to tax the income earned within its jurisdiction. So the headquartered companies are concerned about whether they will now be taxed twice -- first in the country where their major operations are and then in the country in which they are headquartered. For example, the US has a credit system under which companies get tax rebates for taxes paid in other countries. However, under the new regime, if companies have operations in countries with a tax rate lower than 15 per cent and they don’t get tax credit for the tax paid there, then in effect we have double taxation. This is a significant concern for the world’s major corporations.
 

Will these new tax codes have a significant impact on global capital flows, given that tax arbitrage had been a big driver of capital flows and corporate restructuring in the past?
 

The rules are designed to avoid double taxes but implementation will be the key. The new tax regime has been framed to end the race to the bottom and it is too early to say whether it will alter global capital flows or not. However, every country will have to figure out how it wants to design its incentive programme without pushing the tax rate below 15 per cent. Countries may now choose other ways to attract capital.
 

Will these new tax regimes affect compliance cost for companies?
 

There will be an increase in compliance cost for companies since they will now have to do two tax calculations -- one, the regular corporate income tax in the country in which they operate, and an entirely new tax calculation to comply with the new global minimum corporate tax rules. The degree of complexity in the rules and the compliance and the reporting required are cause for concern for many companies. All this will mean that the tax department in companies and even other departments may now have considerably more work.
 

In the post-Covid period we have seen a process of deglobalisation wherein many countries are trying to decouple from global trade and supply chain. Will this derail the effort to harmonise corporate income tax globally?
 

The bottom line is that during the pandemic, governments around the world injected a fiscal stimulus worth $37 billion to keep their economies running. After Covid, we went into inflation and geopolitical issues but this stimulus money is still sitting on the world’s balance sheet and it has to be funded. There are only two ways to fund this -- new or higher taxes or a stricter implementation of the existing tax laws. So post-pandemic we have seen new tax legislation in several parts of the world, introducing new taxes or higher enforcement.
 

There is a concerted effort to provide certainty to taxpayers through the mutual agreement procedure and advance pricing agreements (APAs). Since the launch of the APA programme in India over a decade ago, 516 APAs have been signed up to March 31, 2023, which is a testament to the resolve of governments to take measures to reduce litigation.