Shaping Global Tax Governance

Shaping Global Tax Governance Presented by: Professor Jinyan Li Date: March 25, 2022 Outline - Some facts - Indications of influence in global tax governance - • Institutional participation and multilateralism • International tax norm-setting Some observations Some Facts - Contribution to global GDP growth (constant 2015 USD) 1980-90 1990-2000 2000-10 2010-20 China <5% Over 10% About 27% About 45% USA About 35% About 35% About 10% About 12% Some Facts - Top 10 countries with highest revenue top 500 companies Rank 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. - Country China United States Japan France Germany United Kingdom South Korea Switzerland Canada Netherlands Compare: China-based MNES • 2008: 10 of top 500 Companies 135 122 53 28 27 22 15 13 12 11 • 1995: 2 of top 500 • 1980:0 Some Facts – International Tax - Tax revenue = bloodline of states - Income tax = national (taxing =spending > fiscal sovereignty) - International tax = conflicts of national laws More Facts: Chinese Enterprise Income Tax - 1978-81 • - 1983 • - First tax treaty (Japan 1991 • - JVIT/FEIT FIE and FE Income Tax 2008 • EIT Some Facts – International Tax - MNEs = "global" income - Multiple countries' tax laws - International "consensus" or norms • "Nexus" for tax jurisdiction  Residence of corporation  Source of income • "Arm's length principle"  "market" price expected for intra-MNE group transactions More Facts – International Tax - No international "TAX" organization - No public international law on income tax - Network (4,000 or so) bilateral tax agreements Question - What institutions have been "in charge" of developing international tax consensus? - - What is China's role? International Institutions & China – UN - League of Nations • 1920-46 • China as a member (USA was not) • 1923 Report on Double Taxation • 1928 Model tax convention by "Technical experts"  China represented - United Nations • 1945 - present • China founding member • PRC became a member of SC (1971) • UN Tax Committee (a member from China since early 1980s; sometimes as vice-chair) • UN Model Convention • UN Manual on Transfer Pricing (China Practice section) International Institutions & China - OECD OECD - "de facto" tax organization - 2004: China became "observer" in CFA's work - OECD Model Convention International Institutions & China - G20 - 2016 Hangzhou Communique International Institutions & China - BEPS IF - G20/OECD BEPS Inclusive Framework • OECD →Technical expertise • G20 → Political clout  accounts for around 90% of gross world product  75-80% of international trade,  2/3 of the global population  roughly 1/2 the world's land area - BEPS 1.0 project • - China active participant BEPS 2.0 • China as Deputy Chair of Steering Group (as of Jan.2022) The Global Tax Deal On October 8, 2021, 136 countries of the OECD/G20 Inclusive Framework agreed to a 2- pillar solution to address tax challenges arising from the digitalization of the economy - - Pillar 1: • creating new taxing rights in market jurisdictions • MNE groups with over 10 billion euros in revenue Pillar 2: • creating a floor for a 15% effective corporate tax rate • MNE groups with 750 million euros in revenue "Historical"? - First time in history - Agreed to create a new "global" tax law (multilateral tax convention) for Pillar 1 - Agreed to adopt universal "model" rules into national tax law (Pillar 1 and Pillar 2) - Agreed to create a new class of taxpayers (i.e. large global firms) and tax them based on - "accounting income" Why Did It Happen? 1. Tax = bloodline of state 2. Existing international tax system: • Outdated rules (100 years old, designed for a physical economy) • "unfair" • Loss of tax revenue ("large corporations pay little tax") 3. Political pressure • Citizens and local businesses • Deficit and revenue shortfalls Some Observations: US Influence - Contributor of ideas and principles • Basis for allocating taxing rights  1923 Report (Prof. Seligman)  1928 draft model Tax Convention (T.S. Adams) - - • Arm's length principle (M. Carroll) • Worldwide-based taxation and foreign tax credit Originator of tax rules • Transfer pricing • Controlled foreign corporations (CFC) • Treaty-abuse (LOB) • Anti-abuse rules (e.g., GILTI and BEAT which are basis for Pillar 2) Unilateralism, but "Constructive" • Out of US self interest • US legal instruments (domestic law, US Model Treaty, US constitution – later in time - principle) • US corporations' clout and US tax rules (e.g., foreign tax credit rule) • - Principles- and rules-based; transparent Other countries' transplantation • Out of their own self interest (e.g., Canada) • Countries with similar political/economic systems • Countries attracting investment by US corporations Some Observations: US Influence Declining? - - a) Institutionally? • yes, BEPS IF • EU • G20 b) Scientifically? • - Ideas underlying Pillar 1 and Pillar 2 c) Realistically? • Fate of Pillar 1 and Pillar 2?