If it joins 136 countries’ tax deal: Pakistan to get Rs26 bn extra tax annually, says OECD

ISLAMABAD: The Organisation for Economic Co-operation and Development (OECD) has assessed that there is an impact of up to $150 million (Rs26 billion approx) on Pakistan’s revenues on a per annum basis if it decides to join the tax deal done by 136 countries.

“For Pakistan, if it were to join the deal, we estimate an annual revenue impact of up to USD150 million per annum,” Director OECD’s Centre for Tax Policy and Administration, Pascal Saint-Amans, said while replying to queries sent by The News on Wednesday.

This scribe sent out questions to the OECD’s headquarters last week to get in-depth knowledge about this tax deal signed by 136 countries while Pakistan and three other countries did not join this club under which Multinational Enterprises (MNEs) were bound to reduce the minimum tax to 15 percent till 2023. The OECD replies were received on Wednesday.

When asked why Pakistan preferred to remain outside this deal, the OECD’s Director for Tax Policy and Administration Pascal Saint Amans replied that it was the prerogative and sovereign right of each country to decide whether they would like to be part of any global solution or not. However, the Two-Pillar Solution establishing a new framework for international tax is complex and some countries may need a deeper understanding of the solution and associated rules.

“The OECD Secretariat continues to provide all Inclusive Framework members, including Pakistan, with support in this respect,” the reply stated. To another query whether Pakistan could become part of this deal at the later stage, how and when, the OECD official replied: “Yes, countries can become part of the deal at a later stage. Pakistan will be welcome to join the solution when they have completed their own assessment. They would need to convey to the Inclusive Framework that they would like to be part of the global deal.”

When asked what are the major benefits for countries who signed this tax deal, Pascal Saint Amans said that the Two-Pillar Solution will ensure that all large multinational enterprises (MNEs) will be subject to a minimum tax rate of 15pc, reducing the incentive to shift profits, and will re-allocate a portion of the profits of the largest and most profitable MNEs, including many highly digitalised businesses, to countries where they have their customers or users.

Digitalisation and globalisation have had a profound impact on economies and the lives of people around the world, bringing with them challenges to the rules for taxing international business income. For example, under the current rules, a large, profitable MNE from outside Pakistan that had no physical presence in the country would typically not be taxable in Pakistan on the profits it may derive from users or customers in Pakistan. The agreement provides a solution to this problem.

The agreement would also be a floor on tax competition on corporate income tax through the introduction of a global minimum corporate tax for all large MNEs, at a rate of 15pc. This will reduce the pressure on governments to offer excessive, often wasteful tax incentives, while incentives that attract genuine, substantive foreign direct investment would still be effective. The agreement also includes a provision to protect the right of developing countries to tax certain cross-border base-eroding payments (like interest and royalties).

Under Pillar One, taxing rights on more than USD125 billion of profit are expected to be reallocated to market jurisdictions each year. Developing countries are expected to gain an additional 1-1.5% of corporate income tax (CIT) revenues, on average. Under Pillar Two, the minimum tax is estimated to generate around USD150 billion in additional global tax revenues per year: for developing countries, approximately an additional 1.5-2% of CIT revenues on average. For Pakistan, if it were to join the deal, we estimate an annual revenue impact of up to USD150 million per annum."

In the absence of an agreement, existing tensions and instability in the international tax system would likely have led to a further proliferation of uncoordinated and unilateral tax measures (e.g. Digital Services Taxes) and as a consequence, an increase in tax disputes and damaging retaliatory trade measures. Our estimates suggested that these disputes could reduce global GDP by more than one per cent.

A Detailed Implementation Plan has been agreed to bring the Two-Pillar Solution into effect by 2023. Recognising the challenges and ambitious timelines associated with the new rules, the OECD and its development partners will provide bespoke technical assistance and capacity building to developing country Inclusive Framework members to support all aspects of implementation, the OECD reply concluded.