Can you explain what the agreement entails?
“The agreement, which is coordinated from within the OECD, comprises two pillars: corporation tax is no longer levied only in the countries where a company is established, but also in those countries where the company enters the market. The second pillar is a worldwide minimum profit tax of 15 per cent. If countries impose less, other countries can impose a top-up tax up to the minimum. The aim is for the measures to be introduced next year.”
Maarten de Wilde (1979) is Professor of International and European Tax Law at the Erasmus School of Law. In addition, he is a director at the PwC accounting firm. He also participated in the advisory committee on taxation of multinationals (Ter Haar Committee), which advised the Dutch cabinet last year on measures to make corporation tax fairer.
The Netherlands has also signed the agreement. Does that mean the end of the Netherlands as a tax haven?
“By saying that, you are implying that the Netherlands is a tax haven, and opinions differ on that. It is true that the Netherlands used the tax system as an instrument to compete for investments. But international tax optimisation structures always involve several countries, so whose fault is it if we think that ’not much’ tax is levied? That also implies that we would know what the ‘right way to tax corporations’ is, yet there is no consensus on that.
“Since 2018, the Netherlands has been repositioning itself in the area of corporation tax, as tax competition has damaged its political reputation. By introducing all kinds of measures, the Netherlands has already become less attractive for businesses. One such example is the introduction of the Withholding Tax Act in January 2021, which ensures that interest on debt and royalties earned within multinational companies can no longer be paid without incurring tax in countries with a more favourable tax climate.
Yet the Netherlands is still fourth on the 2021 Corporate Tax Haven Index. Are we going to drop down quickly now?
“That is difficult to say. Through the Advisory Committee on Taxation of Multinationals, we made proposals to the government to make Dutch corporation tax fairer. As part of our research, we also looked at figures up until 2017. The effect of the measures is therefore not immediately apparent. What’s more, tax information is not publicly available in most countries, including the Netherlands. This makes it difficult to really come to grips with the problems and dynamics.”
You state that the Netherlands is already ‘less attractive for the business community’. Do I sense from your words that you think it’s unwise for the Netherlands to take these measures?
“No, it’s really just a matter of what you want to achieve as a country. In a changing world, where people have started to think differently about the taxation of multinationals, the fiscal policy of the Netherlands has led to a reputation problem both in social and political terms. If you want to have any clout in international politics, you have to start thinking about whether you need to revise that.
“At the same time, a heavier tax burden for the business sector also means that capital costs go up, making it more expensive to invest in the Netherlands. At some point, this can lead to companies making different choices. Other countries make other choices. Ireland, for example, is quite transparent about the fact that they want to remain attractive by remaining fiscally competitive. That has brought them a lot in economic terms and, at the same time, a certain reputation. Ireland did not join the OECD agreement because it would have too much impact on their competitive advantage.”
To what extent are countries bound by the agreement?
“Not at all, at least not legally. Countries have agreed that if they do adopt these kinds of measures, they will do so along the same lines. There is no question of a treaty or anything like that.”
The United States took the lead during the run-up to this agreement to introduce a minimum rate of (eventually) 15 per cent corporation tax. Now, 134 countries have signed, but some countries are not taking part. They are not bound by that rate. Does it make any sense then?
“Yes, it is worthwhile. In concrete terms, the agreement means that countries must start looking at each other and need to judge each other. Which country is allowed to levy taxes first? Suppose that the first country allowed to levy taxes, for example, the country where the head office is located, grants a tax subsidy or some other incentive, and in doing so, falls below the minimum. Then a second or even third country can top up that levy to the minimum. This additional levy should encourage countries to comply with the minimum. Without it, companies would be encouraged to move their headquarters or branch office to a low-tax country that is not willing to participate in the agreement.”
So, it is not strictly necessary for a country like Ireland to join this agreement either? You can just levy a supplemental tax if they don’t?
“That’s more or less what the OECD has written in its blueprint. One of the questions under discussion is whether supplementary taxation is actually allowed and whether tax treaties between countries should be amended first. The OECD basically says that this will be fine. But we will have to see if that is legally possible. One lawyer thinks that it is no problem, another says: you may have to amend or terminate thousands of tax treaties to make this possible.”
What do you think?
“That is very difficult to say. My gut feeling would be that the tax treaties as they are structured at present do not allow for this kind of extraterritorial ‘top-up’ tax. This is a thorny issue because if tax treaties have to be changed for this, the question arises whether countries really want to do that. In the US, for example, a qualified majority in Congress is needed to sign treaties, but at the moment that majority does not exist. It will be tricky to get everyone on the same page.
“If the proper legal framework is not put in place, the first company to be subjected to such a levy might well go to court. Then there is a chance that legal proceedings will start all over the world with all kinds of different outcomes.”
Up until now, there have always been clever tax experts who have found a loophole or a vague sentence to enable companies to dodge their tax burden. How high are the chances that it will be possible to close all the loopholes?
“The plans strike at the very heart of our tax system. How do we tax corporate profits? How do we divide the tax base across countries? That is going to be quite a challenge. Our current profit tax system is effectively being weighed down by two new systems on top of it – the two pillars in this agreement. It’s like software: the systems have to be compatible, otherwise it will be a shambles.
“Exactly how we are going to do that is unclear at the moment. But we are talking about legislative operations on a global scale. That has got to be coordinated a bit. All these countries have judges who are going to issue rulings. There is a chance that the rules and their interpretation will diverge from each other. Then new gaps or overlaps might appear, and then countries and companies will have room to play off the differences between systems against each other all over again.”
With all those ifs and buts and uncertainties, is this agreement worth anything?
“It certainly is. Issues that were off-limits a short time ago have now become a subject of discussion. For example, the whole idea that companies should price internal transactions as if they were with third parties and the idea that the tax base belongs in the country where you have the most innovative production and people. That has always been unshakeable. And now all of a sudden you are having a discussion that says: if you are based in one country and sell your products or services in another, is it fair that you only have to pay corporation tax in the first country? If the answer is no, then you have to change the system. That is a huge breakthrough in the status quo in our fiscal way of thinking.
“The same goes for the second pillar in the agreement. This deals with the question: can you, as a country, levy supplementary tax if other countries levy a corporation tax below a certain minimum? Until recently, that was not open to discussion. You were autonomous as a country; other countries had nothing to say about that. The fact that we are now saying that there must be a minimum limit is unprecedented. That’s what makes this a significant development.”
What do you estimate the final outcome will be? Will anything be accomplished by the agreement?
“I do not have a crystal ball, but I think there are three scenarios for the future: nothing changes, there is global harmonisation of corporation tax, or we land somewhere in between the two. In the latter scenario, and my guess is that we will end up there somewhere, the pile-up of tax systems will be messy when things are going well and chaotic when things are going badly. Let’s hope it only gets a bit messy.”
