Corporate Tax

Because the EU and US are “rethinking” corporate taxation, multinational firms are in search of readability

Come to a company balance sheet near you: multi-judicial complexity.

This week, multinational corporations were again alerted in a déjà vu case that a tax settlement is pending. This time the European Union was preparing to sharpen its pencils when it presented a plan for a new framework for corporate taxation.

BRUSSELS, BELGIUM – JUNE 1: EU Economic Commissioner Paolo Gentiloni on June 1, 2021 in Brussels, … [+] Belgium. (Photo by Thierry Monasse / Getty Images)

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The proposal would change not only the rules for how much multinational companies are responsible for paying, but also which coffers the companies would deposit into. The measure – Business in Europe: Framework for Income Taxation or BEFIT – would create a uniform corporate tax standard and reallocate profits between the 27 EU member states.

“It is time to rethink taxation in Europe,” said Economic Commissioner Paolo Gentiloni. “BEFIT will cut red tape, lower compliance costs, minimize tax avoidance opportunities and support jobs and investments in the EU.”

The EU also said it would try to make shorter term changes. This also reportedly includes proposing laws to combat abuse of letterbox companies and incentivize companies to favor equity over debt.

This call to arms of the EU comes amid some major global upheaval in the corporate tax world. Just last week, the US Treasury Department called for a minimum global tax rate of at least 15% to prevent multinational corporations from shifting profits. The 15% rate represents a decrease from the original 21% proposed by US Treasury Secretary Janet Yellen in April, which some countries had scrutinized as excessive.

In addition, the Organization for Economic Co-operation and Development (OECD) will set rules in June on where and how much large multinational corporations like Google, Amazon and Facebook should be taxed, particularly on intangible assets like online sales that span two different ones Tax jurisdiction.

I wrote last month that the real challenge with major changes in global tax laws for multinational corporations is forecasting uncertainty and being ready to meet moving compliance goals today that may be completely different tomorrow. The EU proposal seals this fate for corporate tax departments. While EU officials have given an indication of what BEFIT would include, promises have been made to come up with the plan “by 2023” in detail. This is a schedule that must be viewed as a worst-case scenario for CFOs and corporate tax professionals around the world.

In attempting to do tap dancing on a pin, multinational corporations face a complex dilemma: how to prepare for sweeping changes that will almost certainly come with no real clarity about those changes while trying to manage the global tax compliance optics and trying to recover from a pandemic.

Just like US efforts to curb tax base erosion, BEFIT will require multinational corporations to model the global tax burden under several different scenarios, although it will likely take years to have real legislation. And if they do, how exactly will these new standards align with the OECD guidelines and what impact, if any, will they have on other global tax treaties?

It will be a tedious process that will inevitably increase corporate tax volatility. But companies have no choice but to simply be as vigilant as possible and wait for the much-needed clarity. Even if the next steps are not set in stone, one thing seems clear: The global corporate tax is about to change. Multinational corporations cannot afford to be surprised.

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