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Wealthy Nations Resist as UN Advances Global Tax Reform Initiative

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Wealthy Nations Resist as UN Advances Global Tax Reform Initiative

Pushback from Wealthy Countries: Risk of Diluting the UN’s Global Tax Convention

A minority of countries opposed to a legally binding UN tax convention are attempting to dilute its impact, raising concerns that it could become as ineffective as the OECD’s efforts, experts warn. The ongoing debate over wealth and corporate taxes has become a contentious issue as the United Nations negotiates a framework for a new global tax system.

Read also: Top 5 Corporate Tax-Friendly Nations 

The initial round of negotiations, which concluded on May 8, saw progress amid ongoing tensions between higher-income OECD members and African UN member states, backed by the developing nations coalition, the G77.

“Both the developed and developing countries agreed easily on environmental taxes but strongly disagreed on taxes for wealth,” said Abdul Chowdhary, a senior program officer for the South Centre Tax Initiative. Developed countries argue that the OECD is already addressing tax reforms adequately, while developing nations believe the OECD’s efforts are insufficient and want the UN to play a more significant role.

In November 2023, the UN General Assembly overwhelmingly adopted a resolution proposed by Nigeria to create an inclusive UN forum to address international tax issues, including corporate tax reform and wealth taxes. This move would shift power from the OECD, criticized as a “rich countries’ club,” to a more inclusive global platform.

“It has been quite absurd and sad to see their hesitation because the failure of the global tax system impacts people in all regions of the world, and we urgently need solutions,” said Tove Maria Ryding, tax coordinator at the European Network on Debt and Development.

The OECD defends its record of significant changes in international tax policy, including the 2021 agreement for a 15% minimum tax rate for multinational corporations. However, recent UN negotiations in New York revealed deep divisions over procedural and substantive issues.

Developing countries favor a majority vote for decision-making to avoid diluted resolutions, while wealthy nations insist on consensus-only decision-making, effectively giving a minority veto power. This procedural clash is expected to be a major issue in upcoming negotiations scheduled for late July and August.

Despite pressure from wealthy countries, momentum appears to be with the Global South. Irene Ovonji Odida, a Ugandan lawyer and member of the Independent Commission for Reform of International Corporate Tax, supports the inclusion of corporate taxation in the convention’s terms of reference. She highlights the desire of over 60 countries for equitable taxation of multinational corporations, despite resistance from some Western nations.

The negotiations also touched on leveraging taxation to address climate and environmental crises and the broader issue of domestic resource mobilization, with varying emphases on capacity building and fair allocation of taxing rights.

The next round of negotiations aims to finalize the draft terms of reference, which will be voted on by the UN General Assembly before the year’s end.

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Top 5 Corporate Tax-Friendly Nations 

There are few geographical drivers as powerful for a business as the corporate tax rate. Globally, corporate tax rates vary dramatically. For example, Comoros features a 50% rate while Brazil, Argentina, and Venezuela fluctuate between 34% and 35%. Contrast this with The Cayman Islands, Tokelau Islands, and The Bailiwick of Jersey – all 0% – the variations are notable. 

While a 0% corporate tax rate might sound ideal, firms must consider the local talent pool, costs of living, proximity/accessibility to larger markets, and quality of life. What follows are the top 5 most competitive countries in terms of their corporate tax rate while considering the previously mentioned factors.   

Bulgaria

This small European-Union nation (~ 7 million people) has a flat corporate income tax rate of 10%. Worldwide revenue is taxed on all local firms while nonresident companies are only taxed on revenue generated in Bulgaria. Due to this favorable environment, foreign investment has been a major driver in advancing economic growth. Bulgaria’s skilled workforce for such a small nation and strategic location is also worth mentioning – the country borders the Black Sea with Turkey to the southeast and Greece to its southwest.

Andorra

Bulgaria is small by European Union standards, but Andorra is small by any measure. With just 77,000 people, this landlocked nation between France and Spain is not part of the European Union but does enjoy eurozone membership. The corporate tax rate is 10% and companies are now obliged (as of January 2023) to pay an “object tax” on profits (a minimum of 3%). The 10% corporate tax may be reduced based on the tax on profits of income derived outside Andorra. 

Ireland

Ireland’s corporate tax rate is a tad higher than Bulgaria and Andorra at 12.5%. Yet, it’s an English-speaking nation with a highly educated and skilled workforce that has attracted large firms such as Google and Apple. Ireland boasts the world’s highest number of engineering and science graduates per capita and its access to the UK market makes it a desirable destination. 

Gibraltar

Also pegged at a 12.5% rate, tiny Gibraltar (2.58 square miles) is growing in popularity. Corporate taxes are paid on income generated in Gibraltar and traditional companies benefit from a further reduction. Gibraltar has a thriving banking and financial services sector and its close proximity to the UK also makes it an ideal place for companies seeking a European base of operations. 

Montenegro

From a purely aesthetic point of view, Montenegro tops the list. Beautiful beaches, an agreeable climate, and fantastic food, the corporate tax benefits are just one of a multitude of reasons to consider Montenegro. On profits up to 100,000 euros the tax is 9%. From 100,000 – 1,500,000 euros a 12% tax kicks in (plus 9,000 euros), and from $1,500,000 + a 15% tax is levied. The euro is Montenegro’s de facto currency and it is rumored to be considered for full European Union membership sometime between 2025 and 2030.   

 

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How to Effectively Expand Your Business Globally

These days, businesses that are quickly growing don’t necessarily know the ‘do’s and don’ts’ of expanding into new jurisdictions.  In this post, we will dive into the key issues you should project manage as you plan your expansion beyond borders.

Elon Musk, Jack Ma, Steve Jobs. Each of them started small but shared an outsized goal of making the world a different place. Eventually, they all accomplished this, becoming some of the most influential entrepreneurs the world has ever seen, and scaling their businesses globally.

Almost every business owner I’ve met has similar-sized ambitions. Few are content with staying small. They want to build something that can make a massive impact and become a household name.

But the gulf between aspirations and reality is often vast. You may be standing in your way by not doing something important from the beginning: thinking globally.

Location. Location. Location.

When your company is looking to expand business overseas, pay attention to where and why. Especially the “why.” For instance, many American companies are setting up in various portions of Europe because of the critical talent in those areas. Once you’ve decided on the best location for your business to grow, it’s then time to hire. In your country of choice, you may need to hire a country manager that can help build a team as well as a person or many who can run that facility in areas including administrative, R&D, sales, etc.

Next, you have a few different ways you can expand into your chosen country. The smallest footprint you can have is a rep office, one being established to run market research, but governments have strict limits on how long you can have a rep office. For example, in Singapore, you can only set one up for one-year, but you can get a two-year extension. So, know exactly what you plan to accomplish.  Setting up a subsidiary will be the right choice if you want to send a message that you are there to stay.

If you establish a local subsidiary or other local legal entity, you may need to establish a minimum capital reserve, make your entity subject to legal liability in that jurisdiction, pay taxes, comply with corporate formalities around incorporation, shareholder and board meetings (how frequently and where they are held), local directors and shareholders (nationalities) and more, maintain a local corporate secretarial function, make public disclosures of your accounts, maintain a bank account and comply with local commercial rules that impact how you record revenues and bookings.

While sometimes your business is simple enough that compliance can be managed by an outsourced service or local law firm, some jurisdictions will require you to have people on the ground.

People in places

As you start your operations, next, you’ll have human capital considerations. When you hire somebody overseas, you need to follow local laws. For instance, in Poland, the contract must be bilingual if you are a foreign employer. Bilingual requirements exist in many countries, including Canada, France, Germany, Russia, Ukraine, and Japan. However, in other countries like Singapore and Australia, you will not need to worry about this.

Additionally, you may have to find a payroll service, but there are limitations in some countries, including China, Serbia, and Russia, to get capital into and out of the country. So, it might be necessary to open up a local bank account to pay your local employees. In some countries, you are even able to wire the money to the employees and the government.

How you pay your people may have currency requirements.

Whether you are bringing in human capital locally or from the home country, you may need to complete pre-hire checks and comply with immigration regulations.

Employment regimes

In certain countries like Poland, employment is a matter of the contract, not at-will, which is different in a country like the U.S. The U.S. is the only country that offers employment-at-will. You can say, “I do not want you to work here anymore.” And then you can leave at that moment. But, in most countries, you have to give notice by contract and get severance.

Most countries have collective bargaining agreements, which sometimes can benefit you, while other times not. For instance, if you are party to a collective bargaining agreement (CBA) in Sweden, it negates the need to deal with each employee as a bargaining unit, negotiate with the union or the CBA, and all the employees fall under it. Depending on the country, you have to comply with local working time regulations – for instance, you can’t work on weekends in France. And, in California, if you work more than eight hours a day or 40 hours a week, you’ll receive overtime pay.

When it comes to expanding your business, the right hiring process is just as necessary as the proper exit process. This protects you from being sued for employment practices. By executing the correct standard, the right contract, and the country’s law, you ensure no breach of your contract for the employee or the employer. Next, you have to think about benefits because even though you have an infrastructure that supports medical care in many socialist countries, most employees are used to having supplemental benefits.

Intellectual property protection

This also relates to intellectual property if you hire contractors to do your development work in a foreign country. The IP they are creating may belong to their contractor and not to the company paying for it, so it’s key to have agreements in place with the contractor, so you own your IP.

If you are conducting R&D or exploiting patents or trademarks created in the home country, local intellectual property regimes will be essential in protecting the IP that you create, export, import and ultimately monetize. Sometimes, that might also mean the capability to enforce your IP rights in a country.

Compliance requirements

Beyond employment law, there are compliance requirements to pay close attention to. For example, you may need to have a registered office or provide an office address to the local government. The office might need to be staffed during business hours if somebody wants to give notice, or the government wants to get in contact with your business. In some countries, like Spain, this is changing to an electronic system where you must have a registered email that the government can use to send communications.

When it comes to data privacy, there seem to be new and overlapping (if not contradictory) national, regional, and local regulations published every day. In Europe, the General Data Privacy Regulation, or GDPR, has strict requirements that apply to companies far beyond the borders of the European Union. The China Data Protection Directive has civil and criminal repercussions to those accessing Chinese consumers through the Internet and otherwise. Recently, the California Consumer Privacy Act, or CCPA, became subject to enforcement.  Going global means threading the needle to ensure that you have compliant solutions everywhere you are doing business.

Taxes

Depending on your footprint, it could create a “permanent establishment,” which makes some portion of your revenues subject to tax in a particular jurisdiction. If you establish a permanent establishment, you will have to file a tax return at the end of the year. Even if you do not have a permanent establishment, you may need to file another type of tax return and comply with other requirements.

Additionally, there are tax requirements from both an indirect perspective and a direct perspective. For instance, if you are making a lot of money, you might have requirements to pay estimated taxes during the year and file the income tax return at the end of the year.

Summing it up

Technology, life sciences, medical device, and clean energy companies can not be successful when confined to one or more jurisdictions. Indeed, by definition, they know no borders. To disrupt markets and build share, new businesses increasingly need to grow faster, and go global, from the earliest stages of development. Accessing global markets is key to achieving value and liquidity, and ultimately, ubiquity. Good advisors are critical to helping companies define and execute on a mission to expand their business globally.

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Louis Lehot is the founder of L2 Counsel, P.C., an elite boutique law firm based in Silicon Valley designed to serve entrepreneurs, innovative companies and investors with sound legal strategies and solutions.  Mr. Lehot is a corporate, securities and M&A lawyer, and he helps his clients, whether they be public or private companies, financial sponsors, venture capitalists, investors or investment banks, in forming, financing, governing, buying and selling companies. He is formerly the co-managing partner of DLA Piper’s Silicon Valley office and co-chair of its leading venture capital and emerging growth company team. 

Kateryna Mamyko-Golomb is a law clerk with L2 Counsel, P.C. She advises corporate clients, startups, and investors. She graduated Cum Laude from Northwestern University Pritzker School of Law. Previously, Kate clerked with a major global law firm in Silicon Valley, and prior to her LLM, Kate led an independent corporate law practice in Central and Eastern Europe and served as General Counsel for one of the leading startup accelerators in the region. Kate graduated Summa Cum Laude from Taras Shevchenko National University where she published her thesis: “Government Regulation of Technology Venture Investment” and clerked for the Kyiv District Attorney.

L2 Counsel, P.C. is an elite boutique law firm based in Silicon Valley designed to serve entrepreneurs, innovative companies and investors with sound legal strategies and solutions.

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Responding to an Evolving Global Tax Landscape

Over the last decade, we’ve seen nations start to address the tax challenges arising from the digitalization of their economies. They want to ensure that multinational enterprises conducting significant business in places where they do not have a physical presence be taxed in such jurisdictions. And, like any tax reform proposal, consensus can be hard to reach because there is so much at stake.

Look no further than the digital tax France aimed at Facebook, Google, and other American technology giants. French lawmakers voted to impose a 3% tax on revenues that companies make from providing digital services to French users. The country estimated that the tax would raise more than $500 million, helping fill a budget hole as more commerce moves online.

Italy, Austria, and Turkey also have imposed their own digital services taxes on large tech firms, and several other European nations, including the United Kingdom, the Czech Republic, and Spain, have announced intentions to implement such a tax. These countries are frustrated by failure to reach a consensus on a digital tax across the broader European Union.

The national policies on digital taxes have drawn the ire of many businesses and political leaders at a time of heightened tensions over global trade. After decades of flourishing globalization, the specter of higher taxes threatens to complicate long-standing trade pacts and add complexity to the operations of multinationals.

The French digital tax angered the Trump administration, which threatened to retaliate with tariffs on a range of French goods. The two sides struck a truce last month, where France agreed to suspend the tax.

All the uncertainty isn’t good for tax planning. Businesses must rethink how their operations are being taxed internationally. This will result in strategic conversations that go further than the tax department, affecting the way businesses operate internationally.

Many U.S. multinationals are still coming to grips with Trump’s 2017 tax cuts, which made taxation on global intellectual property much more complex.

In light of these changes, we’ve seen businesses in jurisdictions across the world change their tax strategies to abide by filing laws in their primary country of operations as well as countries they’ve expanded into.

Case by Case: Responding to Evolving Tax Policies

As businesses continue their overseas expansion in 2020 and beyond, it’s imperative to adhere to these policies to ensure compliance with tax filings across multiple jurisdictions. Businesses have made these new policies a priority as they prime themselves to not only respond to tax policy changes, but also anticipate forthcoming changes that may arise in the coming years.

For companies that have already abided by new international tax policies, we are seeing these changes develop in a few different ways.

Take the United States, for instance. Under their hybrid-territorial tax system, companies based in the United States can invest their earnings into lower-tax foreign countries to ultimately see a reduced tax obligation. Digital taxes would serve as a counter to this, taxing American companies for their digital operations within their jurisdictions regardless of lower-tax investments. As such, we see the potential for American companies to adapt their tax filings to retain the lower-tax investment benefits.

Some businesses have had an easier time than others adapting to this policy evolution over the last five years. France, for example, has seen difficulty from foreign companies operating within its jurisdiction as they report to a separate financial tax administration with a completely different set of processes that often aren’t as modern or up-to-date. Now that France has backed down on its digital tax, these difficulties may very well continue.

Moving Forward: What to Expect

But the fight to tax the digital economy isn’t going away. Even some critics have called for a more unified approach, rather than country-by-country legislation.

The Organization for Economic Cooperation and Development is trying to get nearly 140 countries to agree on a plan to modernize tax policies to keep pace with the digital economy. But the slow pace of talks has frustrated many nations, and a global agreement may be years away.

For policies that we’ll see moving forward, we can expect businesses will continue to geographically strategize their tax filings for 1) global tax compliance either in response to, or in anticipation of, updated digital tax policies, and 2) maintaining adequate tax revenues in light of increased taxation as a result of these policies.

What remains to be seen, however, is whether a reciprocating effect will occur – that is, if business adaption to digital tax laws encourage the evolution of said laws to further ensure tax compliance. One thing is certain, however, that the only constant in international tax law is change… and businesses need to be proactive in the way they prepare and respond to these changes.

Businesses should take a holistic approach to ensure their global operations are compliant with all jurisdictions they operate within. Whether that constitutes an internal evaluation of present tax filing processes or a consultation with their professional accounting team to determine the best course of action in light of a potential new policy adoption should be to their discretion and may be dependent on the jurisdictions in question.

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Jason Gerlis is Global Head of Consultancy Solutions for TMF Group in the Americas.