By The Financial District
Dec 4, 20212 min
Leaders of the world’s largest economies hailed a recent agreement to overhaul global corporate tax rules as key ensuring multinationals paid their fair share of tax but they didn’t foresee the deal containing many loopholes, Tom Bergin reported for Reuters.
Photo Insert: The new agreement won’t stop companies from benefiting from a strategy widely implemented in recent years that reduces taxes over a period of up to a decade or more.
The October deal established a global minimum corporate tax rate of 15% aimed at curtailing profit-shifting to lower-tax jurisdictions such as Ireland, where many large international firms have their European headquarters. “It will eliminate incentives to shift jobs and profits abroad,” US President Joe Biden said in early October.
But some companies could still use Ireland to reduce their tax bills even after the agreement takes effect, according to tax specialists and a Reuters review of corporate filings.
That’s because the new agreement won’t stop companies from benefiting from a strategy widely implemented in recent years that reduces taxes over a period of up to a decade or more.
Ireland’s relatively generous tax allowances permit multinationals with a presence in the country to sell intellectual property, such as patents and brands, from one subsidiary to another to generate deductions that can be used to shield future profits from tax.
Companies that have generated deductions to reduce their taxable income by more than $10 billion each in recent years via this tax-minimizing strategy include US technology companies Adobe Inc. and Oracle Corp., corporate filings show.
The agreement, brokered by the Organization for Economic Co-operation and Development (OECD), is due to take effect in 2023. It was signed by more than 130 jurisdictions, including Ireland.
In response to Reuters’ questions, the OECD acknowledged that companies could continue to benefit from profit-shifting strategies already in place but that it expects companies to be unable to build up such tax shields in the future.
The approach typically relies on a company also having a subsidiary in a country with a corporate income tax rate of zero, such as Bermuda, that enables the company to conduct the sale tax-free. By phasing out zero-tax jurisdictions for multinationals, the OECD expects the global minimum tax of 15% will make the strategy no longer attractive.