A proposal presented by US President Joe Biden at the upcoming G7 meeting for a global corporate tax rate of 15% could bring in EUR 50 billion (£ 43 billion) annually for the EU and the UK alone through the British multinational BP, according to research.
If the tax rate were raised to 25%, currently the lowest tax rate within the seven largest economies in the world, the EU would earn an additional € 170 billion annually – more than 50% of current corporate tax revenues and 12% of total health expenditure in the bloc.
questions and answers
How would a global minimum corporate tax work and why is it needed?
Multinational corporations exploit gaps and incongruences in the international tax system through a technique known as “profit-shifting”. Sales generated in one country are artificially assigned to a low-tax country. This is achieved, among other things, by companies setting up a subsidiary in a tax haven and registering their intellectual property there. That company then charges high royalties from the company’s subsidiaries in other jurisdictions with higher taxes. By charging these “costs” to the market where most revenue is generated, profits can be reduced or eliminated, which means no taxes are paid. The license fees obtained in this way are booked as profit at the low-tax location. Profits are often relocated to non-corporation tax countries like the British Virgin Islands or Bermuda.
Tax abuse by multinational corporations and tax avoidance by wealthy individuals cost countries around the world $ 427 billion in lost revenue annually, according to research by the Tax Justice Network campaign group. It is estimated that the UK is losing £ 25 billion in tax revenue due to profit shifting.
Proposals for a global minimum tax rate and the allocation of taxation rights based on where companies make their money – rather than which low-tax zone a company posts its profits in – would help end the “race to the bottom” of one nation cutting taxes Attracting businesses only to be outdone by another country. Such a plan would give governments more confidence in increasing revenue.
The global minimum corporate tax plan has two main elements and broadly follows the work of the OECD One Pillar and Pillar Two blueprints on global tax reforms presented in October.
Under the first pillar, a portion of the profits of a multinational company would be given taxation rights based on the location of its customers, regardless of the company’s physical presence in that location. This could include a threshold that would mean that this would include the 100 largest multinationals in the world, but not smaller companies.
Under the second pillar, governments could continue to set any local corporate tax rate. But as part of a global minimum rule, if companies in a particular country were paying lower rates, their home governments could require “top-ups” to the agreed tax floor, removing the benefit of shifting profits to a tax haven.
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UK-based multinational corporations claim that BP’s corporate tax bill would increase by € 484.9 million, Barclays by € 911 million a year and HSBC by € 4.2 billion.
The estimates will be released Tuesday by a new Brussels-funded think tank, the EU Tax Observatory, which models the “tax deficit” of multinational corporations, defined as the difference between current tax payments and amounts due when global profits are the same rate wherever they are booked.
Biden’s proposal would prevent multinational corporations from shifting profits across borders to take advantage of the most attractive low-tax locations, as their profits would be taxed either at the place of booking or at headquarters at a minimum global corporate tax rate.
The Biden administration initially proposed a rate of 21% but revised the target downward last week saying it should be “at least” 15%, although this is viewed as a “lower limit” by the White House and that discussions continue to do so push forward should rate higher.
British Chancellor Rushi Sunak is seen as skeptical of higher rates for a minimum corporate income tax rate while speaking out in favor of the principle. The Treasury Department has stated that they have concerns that the policy could result in doing business in the UK being taxed elsewhere. The UK has the lowest corporate tax rate in the G7 at 19%, although it will rise to 25% by April 2023.
Gabriel Zucman, director of the EU Tax Observatory, said opposition from the UK and other countries like Ireland, which has a corporate tax rate of 12.5%, should not hold others back.
He said: “The argument people are using now is, ‘Oh, but Ireland doesn’t want more than 15%, the UK doesn’t want more than 15%’.
“But it does not prevent those countries that want to be more ambitious from signing an agreement in which they say for their own multinationals: ‘We will impose a minimum tax of 25% on country profits on your country, even if you use their profits tax in Ireland, we Germany, the USA, France, we will collect the missing 15% to get to 25%. And you know what Ireland can do absolutely nothing, they will keep their rights, but that will be offset by higher taxes in the parent countries. “
The EU Tax Observatory’s analysis of the tax deficits of multinational corporations is limited to those posting country-specific profits, a policy likely to have been opposed by the biggest tax evaders.
However, it turned out that if the minimum corporate tax rate was set at 25%, the EU governments in 2019 alone would tax 12 billion euros from banks based in the 27 countries.
The study also suggests that even if the EU were alone in enforcing a minimum tax rate on the profits of multinational corporations from non-EU countries, the EU would benefit, with an additional 30 billion expected worldwide and the 25% -Rate.
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Zucman said: “Even if there is a global tax treaty, nothing prevents the EU, and more importantly even an EU country or group of EU member states, from being more ambitious in saying ‘we will’ apply a rate of 25%.”
“And if they did that, and collect not only that, but also part of the foreigners’ tax deficit, that would start a race to the top.
“With a minimum tax of 25%, which is nothing unusual for the EU, it will generate 1.2% of GDP in additional income. So I’m not saying it will be enough to pay for Covid and everything, but guess what, it could be a big part of a post-crisis public finances plan. “