Allan Lanthier: The anti-tax haven law is a windfall for … tax havens

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Allan Lanthier: The anti-tax haven law is a windfall for … tax havens
© Provided by Financial Post Deputy Prime Minister and Minister of Finance Chrystia Freeland during a joint news conference in Ottawa on Dec. 13, 2021.

In late December, the OECD issued model rules for its 15 per cent global minimum tax. In an astonishing development, the rules put tax havens — the countries that have long helped large corporations avoid tax — first in line to charge the tax. If tax havens take the OECD up on its offer, Canada’s revenue from the tax could be reduced from $3.5 billion annually to little more than pocket change.

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Large corporations shift billions of dollars of profits to tax havens every year, resulting in an estimated annual global tax revenue loss of US$150 billion. The OECD has been beavering away for years on possible ways to address this tax avoidance and, last year, more than 135 countries representing 95 per cent of global GDP agreed to the framework for a 15 per cent minimum tax. The tax will apply to multinational groups with annual gross revenue of at least €750 million (roughly C$1 billion) and is scheduled to take effect in 2023.

Under the original framework, Canadian corporations with foreign subsidiaries would no longer be able to escape tax on offshore income. The Canadian parent would owe 15 per cent of the subsidiaries’ annual profit, less whatever foreign tax the subsidiaries may have paid — the difference being the so-called “top-up tax,” which it was widely assumed would go to Ottawa.

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The Canadian government was an active supporter of the initiative, and was delighted when a global deal was reached. In an interview with CBC News, Finance Minister Chrystia Freeland estimated that Canada’s share of the pie would be additional annual tax revenue of $3.5 billion, an amount that would come in handy. “We have a great social safety net,” Ms. Freeland said, “a social safety net which costs money.”

In her interview with CBC, the finance minister seemed to positively revel in the cash bonanza for her government. And for good measure, she took the opportunity to take a swipe at big business: you know, the sector that accounts for more than 40 per cent of private-sector jobs in Canada. “The only losers from this deal are big multinational companies who are currently using globalization and the loopholes it has created to avoid paying taxes,” she said.

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In late December, however, the OECD issued a 70-page package with brutally complex model rules that countries such as Canada can use to implement the tax. In a surprising development, the rules give tax havens first crack at the cash by using a new “domestic top-up tax”: the country where the foreign parent company is located is now second in line. In other words, tax havens — including tax havens that don’t even have an income tax — can charge and keep the tax they helped firms avoid.

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Switzerland, a country that has been under fire for years for offering sweetheart deals to large corporations, was one of the first out of the gate. The Swiss finance minister has announced that Switzerland will charge the domestic top-up tax. “If 15 per cent is going to be levied, then we want to levy that in Switzerland,” he said. Around 2,000 Swiss subsidiaries of foreign parents will be affected by the move. The countries where the foreign parents are based won’t receive a dime.

Another country that announced it will apply the domestic top-up tax is the United Kingdom, which is somewhat surprising considering the U.K. has a corporate tax rate of 19 per cent that it is raising to 25 per cent in 2023. The U.K. decision to impose the tax seems based on the fact that its corporate tax rate is only 10 per cent on income derived from patents and other intellectual property.

The Chancellor of the Exchequer stated that “Ensuring large multinational groups pay the right tax in the right place has been a long-standing priority for the U.K.,” with no mention of the fact that the tax coffers of other countries will take a beating as a result.

Where does all this leave Canada? That depends on what tax havens such as Barbados and the Cayman Islands decide to do. There may be a strong incentive for such countries to introduce a domestic top-up tax of their own.

The minimum tax was supposed to reduce tax competition between countries: these new model rules do anything but. The OECD has said it will issue a commentary on the rules in early 2022, so we shall see how all this plays out over the coming months. For now, the only thing that seems certain is that the OECD is in way over its head.

Allan Lanthier is a retired partner of an international accounting firm and has been an advisor to both the Department of Finance and the Canada Revenue Agency.

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