25 January 2023
In 2021, the Center for Tax Policy, under the Organisation of Economic Cooperation and Development (OECD) and at the request of G20 leaders, announced an extraordinary accomplishment: 137 countries, representing 92% of the global economy, had signed an international agreement on a tax structure that included the framework for a global minimum corporate tax of 15%.
The new standard is a dramatic move, sweeping aside the last remnants of loose, longstanding rules that allowed corporations to shift revenue earned in a high-tax region to those with lower or no corporate tax requirements. The new proposals were presented as a “two-pillar solution”: The first pillar would reform existing tax policies to shore up existing rules and adapt them to the digital economy, and the second would institute a “floor” of taxation common to all participating nations that would take away the opportunity to relocate operations to avoid taxation.
The moves came after years of policy reforms by members of the G20, including an end to bank secrecy, which facilitated tax evasion and money laundering. While many forces were behind the push, the crafting of the reforms and securing agreements was the responsibility of the Centre for Tax Policy and a team of 250 experts from 50 countries, led since 2012 by Pascal Saint-Amans.
Saint-Amans came to the OECD in 2012. As a student in France, he had been fast-tracked into a role in public policy and administration (“by accident, I ended up in tax,” he says), a course that led him to the French Ministry of Finance. His role there gained him expertise in global diplomacy and negotiations and ultimately led him to the OECD, which has served as a think tank and policy consulting resource for the leaders of developed countries of the world since the 1960s.
As well as the 2021 agreement, Saint-Amans’ work there culminated in the creation of several international bodies, ranging in membership from 130 to over 160 nations each. While it still faces hurdles for implementation, the new agreed-upon policies have already caused a seismic shift in the outlook for business and potentially for many economies. A reporter called agreement on Saint-Amans’ two-pillar solution, “A massive change that has basically transformed the international tax landscape.”
A surfer in his spare time, Saint-Amans has a taste for adventurous challenges, in his life and in his work. That same appetite has now opened a new phase of career: In October of 2022, he stepped down from his position at the OECD to accept a role as Partner at Brunswick, based in Paris.
“My roadmap at Brunswick is to keep this global perspective in the work of businesses. The outlook for business has some great challenges. And that’s where I think Brunswick can be useful.”
How has the OECD role changed in the last 10 years?
The OECD is originally the product of the post-World War as the organization to distribute the Marshall Plan. It was an arm of the West versus the East, the Socialist countries of the USSR. Over time, it turned into an economic think tank for economic outlooks, while setting some standards, including on corporate governance, trade, investment, taxation.
With the global financial crisis around 2007-09 and the emergence of the G20, there was a very brutal and significant change of global governance. The G20, being an informal body, needed organizations to feed them with substance. The OECD under the leadership of Angel Gurría, who was then Secretary General, positioned itself as the organization to serve the G20 on many fronts. That’s where my role comes in; I was in charge of taxation, one of the hot topics dealt with by the G20.
The OECD today is an organization of 38 member countries, mostly the traditional Western countries—the US, Western European countries, Japan, Australia, New Zealand. But it has enlarged to include Eastern European countries following the fall of the Soviet Union, and now, increasingly, emerging economies like Chile, Colombia, Costa Rica, Mexico, South Korea, Turkey. So it’s a mixture of so-called like-minded countries, free-market oriented. They are attracted by the very active role the OECD plays now in the G20 context.
Does anyone like to pay more taxes? No. And that's perfectly legitimate. However, the system was not sustainable as it was.
How did you arrive at the two-pillar solution and what are the implications?
Until the global financial crisis, we had an international tax system which was made of some rules that had initially been established by the League of Nations in 1928. The system clearly was no longer up to date, given globalization and the financialization of the economy that resulted from the ‘80s and ‘90s. The global financial crisis revealed to the world that the system was broken, resulting in them losing massive revenue to tax havens. We at the OECD—me with Angel Gurría, then the Secretary General—proposed to address the issue.
We did it in three phases. The first thing we did was to put an end to bank secrecy, putting a standard to tax cooperation. The second phase—you had a divorce between the location of the work and the location of the profits, which may be in jurisdictions where you might have only two or three employees. We call that “base erosion and profit shifting” or BEPS. Corporations were able to take advantage of the system to avoid taxes. So that became a new four-letter word in the tax world and was the big project that was endorsed and strongly supported by the G20 leaders. In 2010-2011, they agreed to fix the rules to make sure that companies pay their taxes where they have their activities. The US tax reform in 2017 drew on the changes we introduced to international tax system.
Still, we were left with some remaining challenges. Companies could still move more substantial operations to zero-tax or low-tax jurisdictions, as a cover to go on doing what they had been doing. So the tax challenge was not over. Meanwhile, European countries mostly, but also developing countries, were quite frustrated with the tax challenges of the digitalization of the economy. How do you tax pure-digital players who may derive massive income from your territory without being physically present?
The Europeans decided to act unilaterally to establish some digital service taxes. In response, the US took trade retaliation measures. So these issues opened the risk of trade wars.
We decided we needed the two-pillar solution. One pillar will be new rules to share the profits of companies among countries, to give more taxing rights to the market jurisdictions globally. Pillar two, in order to limit tax competition, we also needed to put in a floor—a global minimum tax. It was agreed by 137 countries, more than 92% of the world economy.
It’s a once-in-a-century change—last time was 1928. I think the public was surprised when we delivered the end of bank secrecy. Nobody believed that we would do the BEPS work in two years’ time, which we did. The deal on pillar one and pillar two came also as a surprise, because it confirmed that we could do the thing. I personally had some doubts at some point that we would be able to deliver. But we were on a mission.
What kind of implementation are you seeing from the signatory states?
The reallocation of taxing, pillar one, requires a multilateral treaty, which in the US will have to be ratified by the two-thirds majority in the Senate. So the proposition isn’t easy. However, the counterfactual option results in trade wars—so that makes me think that this will happen.
Pillar two, the global minimum tax, is a very smart design that makes sure that you don’t need all the countries to implement for it to have an impact. It’s enough to have a critical mass of countries for all the companies in the world to pay the minimum tax. You don’t need to have Cayman Islands or Bermuda on board.
In spite of a longstanding reluctance from Poland and Hungary, the EU adopted a the minimum tax with a directive approved at the end of 2022. The minimum tax will become a reality in all EU members starting in 2024. This adoption by a critical mass of countries will have a domino effect. The UK, Japan, Canada are moving. So are a number of emerging economies but also low tax countries. Switzerland is even amending its constitution to be in a position to comply with the minimum tax!
Are the multinational corporations on board with it?
It’s challenging in terms of compliance and impact on your tax profile. But we’ve turned the page of the League of Nations. We’re in a new world. It’s no longer the ’80s, in the ’90s, the early 2000s, where you have the tax guy taking care of tax and you tell him, “The less tax I pay, the better off I am.” Now it’s, “Am I able to defend the tax profile of my company to my shareholders, to the investors who care about ESG, to the public that may care about having massive amounts of money in tax havens, to politicians across the world?” I think this clearly makes it urgent to bring tax into the C-suite, into the boardroom, to have a check on the business’s tax policies. Companies will really need to pay attention to this in all the countries they operate in.
Does anyone like to pay more taxes? No. And that’s perfectly legitimate. However, the system was not sustainable as it was. Companies have started to understand that it was too good to be true. For a few decades, they have had kind of a windfall profit from the fact that governments didn’t fix the broken system. It had been designed a century ago in a world of sovereign states with closed economies. With globalization, it should have been updated.
The status quo, no action of the international community—what would that have meant? It would have meant that countries would have acted unilaterally to grab the tax they thought they were losing to tax havens. So instead of having a cooperative, coordinated approach by countries with common rules that provide some level of certainty hopefully, you would have had pure unilateral measures. That was not good for business in the long term.
It’s more than the quarter financial reporting that you need to do. This long-term vision of countries in some form of tax war or trade war is not your day-to-day business. That still is the threat if the solutions we found are not implemented.
Taxes in general are not a particularly sexy topic for media or any kind of communication arena. Has it been a struggle to break through that communications barrier?
It’s interesting. When I started my career, you would say at a dinner, “Oh, I’m the tax guy,” and everybody would kind of vacate around you. Now, I’m considered the “rock star” in taxation. I’ve made the people, the public, sensitive to the tax challenges, making them realize that it’s not a dry technical thing. Rather, it’s at the core of the social contract. Consent to tax, compliance with tax is at the core of the social contract in societies which have been through the increase of inequalities and some serious challenges in terms of social cohesion. So, in spite of the technicalities of international tax, it actually is pretty sexy, if you want to use that term. It turns out it’s a topic that actually mobilizes people.
In spite of the technicalities of international tax, it actually is pretty sexy, if you want to use that term. It turns out it’s a topic that actually mobilizes people.
There’s been a lot of talk about whether a global recession is looming. Do you have any thoughts on that?
I’m not a lawyer and I’m not an economist either. What I can say however is, we are at an extremely challenging, difficult juncture. The overall global governance that we’ve known for the past 15 years—I would say even 40 years—of peace is threatening to come to an end. With what’s happening in Ukraine, with the tensions with China, we have a sense of that. And I do not see an improvement in the geopolitical outlook, which is worrying, and which has, by definition, consequences on the economic outlook. So that’s one.
Two, obviously, inflation is something that companies had lost sight of. Most business leaders have heard about inflation in their childhood, or when studying, but have not really lived through that. I vaguely remember my parents talking about inflation in the ’70s and early ’80s, but then it stopped. And it stopped almost everywhere in the world—except Japan, where deflation was the main issue.
It’s a challenge for us all to think what inflation will mean for business leaders, what impact it has on the reallocation of resources, of income between capital and labor. The outlook is full of big challenges.
Do you think the pressures of climate change are driving a lot of ESG concern and the willingness to discuss tax policy?
Oh yes, absolutely. The last thing I did at the OECD before leaving was to help the new Secretary General to establish an Inclusive Forum on Carbon Mitigation Approaches, which is kind of a code name for carbon taxation. Carbon pricing is the better word.
Everybody agrees that we need to put a price on carbon emissions. I’m not sure anyone agrees on the way forward, one, because putting an explicit price on carbon emissions very often results in the government losing elections, in the people demonstrating in the street. The Yellow Vests in France is a good illustration of that challenge. An emissions trading system can be a way forward.
Businesses must anticipate and think of the consequences, because there will be tensions. The EU has adopted a Carbon Border Adjustment Mechanism [which taxes a select group of carbon sensitive imports]. This mechanism will trigger some trade tensions. You have a number of countries including the US and China, the two biggest emitters, using implicit carbon pricing through regulations. Others are using explicit carbon pricing. How do you articulate that if you want to level the playing field?
And finally, you have the issue of financing the transition. If you talk to India, which took the presidency of the G20 on the 1st of December 2022, India will say, “The world is polluted, but you have ensured your development, your wealth by polluting for 200 years. Now that it’s my turn to develop, I should stop? No way. Provide the funding, the financing.”
So it’s a multicolor issue that is about the most efficient and economic routes to put a price tag on carbon, the best international cooperation to limit negative spillovers and avoid tensions, and the Global South issue of funding the green transition. It’s fascinating, it’s massive and it’s uncharted territory. It’s urgent as well. So, a big headache for everybody.
You need a political dynamic, which will be the driver getting countries to move together. To get that political drive, you need some form of global governance, global bodies to respond. So far that has been the G20, but the G20 is in crisis. So we are at a juncture.
That’s the challenge I think that we are facing on climate change, where there is urgency but diverging interests in the short term. They come together in the long term, to protect the planet from burning down.