The topic of the intersection of international tax and geopolitics is not an easy subject to venture, especially when writing from a small sunny country in the south of Europe far detached from the reigns of world power.
Back in 2018 and 2019, I already dared to share glimpses of some ideas but the recent “tectonic shift in European history” may deserve re-examining the topic of tax multilateralism in times of war.
The point I raised some years ago, was that international taxation developments were evidently being “used” in the push for multilateralism but without resolving some key underlying trade imbalances and supply-chain distortions one could end up derailing the momentum for a further tax harmony (or harmonization).
That was evident, for example, on the case with the initial trade wars or skirmishes, where even imports over champagne, cheese and handbags were being applied to curtail plans for France to roll-out their digital service taxes (see this example).
In the tax field, it is undeniable the incredible OECD efforts – under the mandate of the G20 – to lead the charge against planning strategies used by multinational enterprises that exploit gaps and mismatches in tax rules via the profit shifting and base erosion (BEPS Project) and establishing new global norms on exchanges of tax information.
Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI), Common Reporting Standard (CRS) and more recently the two-pillar solution, are the “faces” of this push for Multilateralism.
Those efforts have undeniably changed the traditional (bilateral) dynamics of international tax law and established an architecture entrenched in a multilateral framework epitomized by the 141 Member-State OECD/G20 Inclusive Framework.
It is indisputable that history has taught us that strong institutions and leadership are fundamental to prevent unnecessary fragmentation, because the so-called “novellas” that brewed the last years on capturing of digitalisation via digital service taxes showed the perils of how unilateralism and roadblocks on trade may lead trading partners to raise stakes against each other.
Today we are living a different scenario and possibly even a transforming world. A war scenario (as we have seen with also some unprecedented sanctions) is equally a form of trade war and may spill over to international cooperation and openness in other areas. Restrictions will follow regarding investment flows, persons, information, aid and cooperation on international rules may suffer a clear set-back.
French President Emmanuel Macron commented a few years ago that “a trade war is always a war lost by all” and the same may be said for any type of conflict. The question should be on the challenges ahead.
It was not me who first raised the doubt if the Tax Multilateralism could be the case of the new Emperor Clothes illusion.
Perhaps a point may be made – are these times of remake of the world and acceleration of the reversal of globalization leading to a pause on tax multilateralism or a revision of its key tax policy priorities?
Even in pre-covid times, we were already living with renewed pressures on globalization and trade and therefore it only seems logic to argue or expect some degree of impact from an armed conflict affecting large trading blocs in the reversal of globalization and new challenges to the current trade regime.
One of the four economists that prepared the first League of Nations study on the economic aspects of international double taxation, also wrote 100 years ago that war expenditures can be met in three ways: by taxes, by loans, or by paper money.
But deficits are already strained as to how to deal the COVID emergency and most governments already borrowed massively and printed money, plus with a war ranging inflation is also creeping.
Ultimately in this interconnected world, geopolitics may play an increasingly significant role in linking renewed destabilization trade issues and international tax policies.
For example, the EU faces new challenges such as energy security on top of the others such as the decarbonisation of the economy that were already prevalent pre-war and policy proposals will require tapping the EU tax toolbox as part of the EU Budget (the so-called EU taxes).
Likewise, the war status and shifting balance of powers between west and east or between trading blocs such as US, China/Russia raise the debate of what I have called the silent “great divide” when it comes to sustainability, social models, tax mix, neutrality, allocation and accountability on tax revenues and predictability.
Once the money printing press stops, taxes will be increased, and novel solutions will be critical to deal with revenue shortfalls. I am not so sure that the push towards MNEs paying the “tax hike” will be the final winner and other solutions may likely appear from behind the bushes, such the global carbon tax or even a global wealth tax.
In addition, a lateral question may be made on the timing and even merits of rolling out the unprecedented OECD two-pillar solution in times of war or redesign of global trade relations.
If one recalls the essentials of the OECD two-pillar proposal, we should highlight that Pillar One involves a partial reallocation of taxing rights over the profits of the largest and most profitable multinational businesses (Ultra MNE) to the jurisdictions where consumers are located. Pillar Two, on the contrary, is focused on ensuring that MNEs pay a minimum corporate tax rate in every jurisdiction they operate.
One could argue that shifting of tax collection to market jurisdictions could be possible when the trade outcomes are predictable not when the forces against globalisation are reigning or the results of its application may even become truly unpredictable. On the other hand, one could also raise that the level playing field for a minimum rate of corporate tax should only advance where there is a level playing field and not when domestic companies (often state-owned) retain an ability to compete globally with prices that distort competition through subsidies or other exceptional access to state financial resources.
It comes as no surprise that for example European version of Pilar Two Directive proposal has already hit a first roadblock as EU Member States disagreed in the last meeting either on scope or timing issues. US trade organizations are equally lobbying for a delay for a reasoned reconsideration of how domestic US tax rules interact with new foreign taxes contemplated in that same two-pillar proposal. Behind the scenes, one may imagine that more is being pushed to at least reconsider the ambitious timetables put forward.
We are all aware that proliferation of unilateral international taxes in the medium-term will likely only to rise further tax uncertainty, as countries will only refrain of adopting such measures if they strongly believe that a multilateral solution remains viable. This means that multilateral solutions are not found and implemented, domestic law will likely step-in full force. Today’s value of an international tax treaty is less than at the beginning of the BEPS project and the effects of unilateral moves in times of war are unpredictable.
I am not a proponent of status-quo but balanced international tax policies take their time to be effective and there may be even be a need to streamlined current proposals to the new context. War and Tax is an extremely volatile combination but perhaps it may yield and opportunity to make a first real attempt to establish a World Tax Organization. Time will tell the value of tax multilateralism in times of war.