OECD Could Consider New Way to Tax Controlled Foreign Corporations

Oct. 5, 2018, 9:30 PM

Officials from the world’s largest economies are calling on the OECD to consider changing the way multinational companies are taxed worldwide—inspired in part by U.S. tax reform, a U.S. Treasury official said.

The Group of Seven has requested from the Organization for Economic Cooperation and Development a policy paper on how multinational companies’ controlled foreign corporations (CFCs) are taxed, said Lafayette G. “Chip” Harter, deputy assistant secretary of international tax affairs at the Treasury Department’s Office of Tax Policy.

The G7 is interested in a new multilateral solution that ensures those entities pay a minimum level of tax, no matter where they are located, Harter told Bloomberg Tax in an Oct. 5 interview at the American Bar Association tax section meeting in Atlanta.

A multinational’s CFCs are the foreign corporations it directly or indirectly owns.

There would be significant ramifications for companies and tax authorities if the OECD were to proceed with this project and eventually gain consensus among countries to adopt a global minimum tax. It could portend the beginning of the end of tax competition among countries who seek to attract multinational business with advantageous tax rates and incentives.

U.S. May Support Project

The goal is to ensure a multinational’s CFCs are paying at least a minimum rate of tax to the jurisdiction in which they’re operating, Harter said.

The U.S. might support the project because U.S. multinationals already must comply with a similar CFC regime under the global intangible low-taxed income (GILTI) rules, Harter said.

GILTI, part of the 2017 U.S. tax overhaul legislation, requires U.S. shareholders owning 10 percent or more of the stock of a controlled foreign corporation—by vote or value—to pay tax on income in excess of 10 percent of tangible depreciable assets. If that income isn’t already taxed at a certain rate elsewhere, the U.S. imposes a minimum tax.

Multilateral Approach

Taking a multilateral approach to a minimum CFC tax would “tend to level the playing field,” Harter said. Adopting this approach would make it harder for countries to use low tax rates or lax CFC rules as a competitive advantage to lure multinationals, and would subject multinationals in other jurisdictions to rules like those under which their U.S. counterparts now operate.

The U.S.’s GILTI rules were in part a “catalyst” for the discussions, though the ultimate plan might not exactly resemble some aspects of the GILTI rule, such as the types of calculations it requires, Harter said.

“I think U.S. tax reform has an important role in catalyzing some of these discussions, in persuading some other countries that these types of discussions are necessary and potentially fruitful,” Harter said.

European Union Rules

Such an approach also would go farther than the European Union’s CFC rules, including, for example, the anti-tax avoidance directives all European Union member states are required to meet, he said.

The project would extend the work begun with the OECD’s base erosion and profit shifting (BEPS) project, which seeks to transform the international tax environment by cracking down on the rules that allow multinational companies to lower their tax bills by artificially shifting profits to low or no-tax jurisdictions.

The OECD began its BEPS work in 2013, and in 2015 released a final report with 15 specific action items on issues like permanent establishments and dispute resolution. Jurisdictions implement BEPS standards through changes in domestic law and bilateral tax treaties.

Harter emphasized that the discussions are still “very preliminary.” The policy paper, should it materialize, would kick off discussions at the OECD roughly within the next six months.

The OECD and those working on the proposal would still need to address issues like making sure a multilateral approach to CFC taxation doesn’t lead to double taxation, he said.

For a roundup of the day’s coverage of the Atlanta meeting, see our ABA Tax Update.

To contact the reporter on this story: Isabel Gottlieb in Washington, D.C. at igottlieb@bloombergtax.com

To contact the editor responsible for this story: Kevin A. Bell at kbell@bloombergtax.com

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