Last month, the G7 countries agreed an “historic” deal to global corporation tax rates to make multinational companies pay more tax.
In essence, the agreement, which was co-ordinated by the Organisation for Economic Co-operation and Development (OECD), will ultimately see companies “pay the right tax in the right places,” according to one tax expert.
The G7 group also agreed to introduce a minimum global corporation tax rate of 15% in an attempt to stop countries undercutting one another.
Janet Yellen, US Treasury Secretary, declared the latter measure, which was agreed in principle, would “end the race to the bottom in corporate taxation”.
Earlier this month, the landmark agreement was endorsed at a meeting by financial chiefs of the G20 economies. It is hoped the proposals, which have been approved by 130 countries and jurisdictions around the world representing more than 90% of global GDP, will be officially signed off at a meeting of G20 countries in Rome in October.
So how will the new agreement work and what will the impact be on multinational food companies?
Historically, the issue of where some large global companies pay tax has been riddled with controversy. The problem stems from the fact that, under the existing taxation framework, companies are allowed to make profits from the sale of their goods to customers in one country and then pay tax on those profits in another country where they are ‘headquartered’ and where the corporation tax rate is lower. Companies that take this approach can potentially shave tens of millions of pounds off their annual tax bills.
Such tactics, which are legal, have been controversially used by some of the global tech behemoths in recent years. In the food sector, multinationals like Unilever, PepsiCo and Mondelez International have all been accused of underpaying corporation tax due to the loophole.
But if the plans are rubber-stamped in October, as expected, this loophole will essentially be closed off to global businesses for good.
“The agreement means that large multi-national businesses will no longer pay tax based on the location of their people and assets, but also the location of customers, and it will reduce the capacity of countries to continue to lower corporation tax rates and therefore also the ability of multinational businesses to shift profits between jurisdictions to gain tax advantage,” explains Ross Robertson, international tax partner at accountancy and advisory firm BDO.
The agreement has been broken down into two pillars. Pillar one states multinational companies that have a profit margin of at least 10% will be taxed at a rate of 20% on any profit above that in the country where they operate. Pillar two is the commitment made by countries to not lower corporation tax below 15%.
“The territories that stand to gain under pillar one are those territories which have large consumer bases, whilst those that stand to lose are those with export-focused economies,” says Robertson. “However, many territories don’t fit neatly into either bucket. For example, the US is a hub for many large multinationals, but also has a large consumer base.”
He adds the agreement is “radical in the sense that the principle of pillar one rips up a century-old view that businesses should be taxed by reference to physical presence, not where their customers are”. However, he says “the effect of that shift is limited by the initially high revenue threshold of EUR20bn (US$23.62bn),” which is proposed to be placed around pillar one.
To date, multinational food companies have not said much about the new tax agreement. When contacted for their thoughts on the changes and what impact they might have on the way their businesses are structured, a number of the largest food groups in the world either declined to comment or failed to respond.
One that did provide commentary via a spokesperson was Nestlé. They said the company was “following closely the efforts by the OECD to develop a new international tax framework with a global minimum tax rate and a re-allocation of taxation rights based on where business activities actually take place”.
The spokesperson added the company’s “effective tax rate” in 2020 was 24.2% and that “Nestlé already pays taxes in around 150 countries fairly and in line with the location of our business activities. We see paying our taxes as a part of our responsibility as a global company”.
In a statement, Mondelez said it monitors developments in tax policy globally and “took note of the announcement made in June by G7 finance ministers on making changes to the global tax system”.
The Cadbury and Oreo owner added: “We have been closely following the ongoing negotiations in the OECD on revisiting tax allocation in a digital economy and imposing a global minimum tax”. Mondelez also said the company would continue to monitor these negotiations in the lead-up to the October meeting of G20 leaders in Rome.
As things stand, it’s difficult to assess how global food groups will be affected by the tax agreement, according to experts. As George Bull, tax consultant at RSM, explains: “Only the largest companies engaged in the global production and trade in food-related commodities may in principle be required to pay more tax under pillar one. As the research shows, the number of such companies is likely to be small. There may also be a pillar-one liability for the very largest processors and distributors of branded foods.”
Robertson is also unsure what the exact fallout from the new agreement might be for global food groups. “Pillar one will see reallocation of IP-related profits, which in the food sector would be predominantly brand-related profits, and I suspect the use of low tax jurisdictions is less prevalent in the food sector – perhaps with procurement hubs as an exemption – so pillar two may be relatively less significant,” he says. “Looking at the initial scope of pillar one, I think there are less than ten food companies within scope – possibly only as many as five.”
Robertson adds that, as pillar one seeks to reallocate the payment of taxes from “residual profit territories to customer territories”, he does not expect to see companies seeking to change customer territories due to a reallocation of part of their residual profits.
“Likewise, pillar two has multiple legs, and simply changing parent jurisdiction, which may well not be simple for a listed multinational, may not in itself provide any benefit, as top-up tax would still likely arise in respect of low-taxed profits even if that did not happen in the ultimate parent jurisdiction,” says Robertson. “So I would not expect substantial restructuring.
“However, minor restructuring or alterations to transfer pricing policies may occur to provide some modest benefits even if only as a function of reducing administrative and compliance burdens of complying with the new rules.”
There is a slim possibility some multinational food companies could go down the restructuring route and seek to register operations in some of the countries that have yet to sign up to the new tax agreement. The likes of Kenya, Sri Lanka and Barbados have not yet signed up, while Ireland, Hungary and Estonia – three EU countries with low corporation tax rates – have stated their opposition to the changes.
“Ireland has had a 12.5% tax rate for many years now,” says Tim Humphries, a director at Menzies. “The recovery of their economy since the credit crunch has hinged on being able to attract the likes of Google to set up their European headquarters there. Following Brexit, setting up in Ireland also gives multinationals access to EU markets.”
He suspects the EU may introduce a directive next year making it EU law to have a minimum 15% tax rate, which would force Ireland, Hungary and Estonia to comply with the pillar two proposal.
Speaking at the recent G20 meeting, US Treasury Secretary Yellen pointed out it was not essential that every country be on board with the plans anyhow. “This agreement contains a kind of enforcement mechanism that can be used to make sure that countries that are holdouts are not able to undermine … the operation of this global agreement,” she told the media.
As for next steps, the OECD has put in place an ambitious timeline by which it aims to conclude the negotiations. The first milestone is in October this year when the organisation hopes the remaining technical work on the two-pillar approach will be finalised. The approach could then be signed off at the G20 meeting in Rome, which is scheduled to take place that month, with a view to implementing the new tax agreement in 2023.
RSM’s Bull says that, if the preliminary agreement is finalised in October as planned, individual countries will then have to address how to apply the legislation for themselves. “Once the picture is clearer, companies may restructure to obtain the best tax outcome,” he adds.
Until the final agreement is fully signed off and clarity is provided on the future tax landscape, global food groups will be watching developments with interest.