Cyprus could veto the EU’s adoption of Joe Biden’s proposal for a global minimum corporate tax rate, the country’s finance minister has suggested.
A White House proposal that multinational corporations apply a 15% tax rate on profits in all jurisdictions is expected to be approved in principle by finance ministers of the world’s seven largest economies, the G7, at an upcoming meeting in Cornwall.
This is to prevent multinational corporations from shifting their profits across borders in order to take advantage of the most attractive low-tax locations.
Should companies attempt to book their profits in a low-tax country, the country where the multinational is headquartered would, under the proposal, levy additional taxes to ensure that the global minimum rate continues to apply.
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 evasion 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 what low-tax zone a company makes its profits in – would help end the “race to the bottom” of one nation cutting taxes to attract business 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 taxable rights based on the place of residence 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 charge “top-ups” to the agreed tax floor, removing the benefit of shifting profits to a tax haven.
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There is significant support for the idea in Europe, but in a speech to the European Parliament’s Economic and Monetary Committee, Cyprus’ Finance Minister Constantinos Petrides said his government is against an EU directive that restricts national tax policies. An EU tax directive would require the unanimous support of the 27 member states.
Cyprus and Ireland have the lowest corporate tax rates in the EU at 12.5%, and both countries have called the debate a debate about national sovereignty.
“We advocate maintaining the policy of setting the tax rate as a national competence and maintaining a corporate tax rate appropriate for the sustainable development of the economy and investment,” said Petrides.
Sven Giegold, a German MEP and finance spokesman for the Greens in the European Parliament, said a “coalition of the willing” within the EU should nevertheless join the Biden Plan.
He said: “It is an illusion to believe that we can make significant progress on tax matters without considering alternatives to unanimity in the Council.
“We must stop European tax havens like Ireland and Cyprus from sabotaging much-needed advances in tax matters.
“Instead of snuggling up to inner-European tax havens, European countries should develop a progressive tax agenda together with the USA.”
Biden had originally proposed a global tax rate of 21%, but it was lowered after negotiations with other major economies.