The Risks of Transfer Pricing and the Fate of the Global Tax Consensus Amid Geopolitical Conflicts

Geopolitical conflicts and global inflation have not only triggered supply chain crises and energy crises but have also blocked access to commercial markets in many regions, which have a serious impact on transfer pricing policies and have the potential to hinder global tax consensus.

It has been more than two months since Russia invaded Ukraine.  Various rejections, criticisms, and economic sanctions from the United States (US) and its NATO allies mean nothing to Russia. Vladimir Putin just got wilder in deploying a fleet of Red Bears to bombard his neighboring countries. 

The war of the two former Soviet Union civil wars is now getting crazier, triggering energy crises and inflation in various countries, following the soaring global commodity prices. Although the economies of Russia and Ukraine account for less than 2% of world GDP, they are both important producers of the world's major commodities, such as gas, wheat and potassium. 

The feud between the two neighboring countries has heightened the anxiety of the global public, which has so far been highly dependent on the supply of these commodities. 

The Organization for Economic Co-operation and Development (OECD) predicts a prolonged Russia-Ukraine conflict will not only lead to higher inflation but also could erode global economic growth by more than 1.08%. The most severe economic deterioration will probably occur in Europe and the US, which have the potential to shrink 1.04% and 0.88%, respectively. 

The geopolitical conflict and global inflation have become a serious concern for policy makers and the business world. Especially multinational companies, which are threatened not only by a supply chain and energy crisis, but also by closed market access in a number of regions. 

The US and European interference in the Crimean Peninsula war, by freezing the assets and companies of Russian tycoons, infuriated the Kremlin. Russia has threatened to revoke the Intellectual Property (IP) rights of global brands that leave its territory. This will have a serious impact on the transfer pricing (TP) policies of multinational companies. 

Not only that, the Russia-Ukraine conflict can also affect important agendas in various international forums. One of them is the fate of the global tax consensus at the G20 Summit which this year Bali, Indonesia will host.  

A few months before the G20, the US came out loudly against the arrival of Vladimir Putin and representatives of Russia at the annual meeting of leaders of the world's 20 major economies. Meanwhile, Russia is one of the 141 member countries of the OECD Inclusive Framework with the power to influence the directions of discussions and the eventual conclusion  of a global tax agreement. 

The current global tax consensus focuses on two pillars that are expected to be agreed upon as a common solution in dealing with increasingly dynamic tax challenges in the digital economy era. 

The first pillar contains taxing rights for countries that serve as marketing locations for multinational companies. In this case, any multinational company with a global revenue of more than 20 billion euros must reallocate more than 25% of its profits in the jurisdiction where its customers or service users are located. 

Meanwhile, the second pillar underlines the importance of joint efforts to avoid global tax erosion, often known as global anti-base erosion (GloBE). GloBE requires the application of corporate income tax with a minimum rate of 15%. The minimum tax targets all multinational companies with a revenue of more than 750 million Euros a year. 

The G20 countries, including Russia, have actually agreed on a consensus on the two pillars of global taxes to be implemented in 2023. However, wide-ranging conflict may hinder implementation, considering that most of the clauses in Pillar 1 and Pillar 2 must be contained in multilateral agreements that also involve Russia. 

The Indonesian government as the presidency of the 2022 G20 meeting certainly does not want to miss the momentum of this digital tax consensus to disrupted by geopolitical issues. In addition to credibility as the host at stake, a global consensus is highly expected by Indonesia to be achieved, because it creates a new source of tax revenue. 

*Author: Asep Munazat Zatnika (Researcher MUC Tax Research Institute)

*Disclaimer: This article is the author's personal opinion and does not reflect the attitude of the institution in which the author works.

*The article was published in Kumparan.com (27 May 2022)

 

 

Kumparan.com

Disclaimer! This article is a personal opinion and does not reflect the policies of the institution where the author works.