Corporate Tax

Europe’s low-tax nations had been getting ready for the battle over the US corporate tax plan

The European low-tax nations have reacted positively to the Biden government’s plans for radical reform of global corporate taxation, even if they will lose – but signaled that Washington can expect a dispute over many details.

The proposal, first published last week, aims to break the impasse in longstanding global talks led by the OECD Club of Rich Nations. This would give countries the power to levy corporate tax on US tech giants and other large multinational corporations and introduce a minimum global corporate tax rate.

That would be a blow to Ireland, the Netherlands, Luxembourg, Malta and Cyprus, all popular bases of the world’s largest corporations who have vigorously defended their right to set corporate tax at the level of their choice.

Even so, Dublin said it was “for an agreement. . . This can give stability to the international tax framework ”, said Hans Vijlbrief, the Dutch finance minister, the Biden plan is a“ big step towards finding global solutions and developing effective rules ”.

“Few countries will ever criticize plans to eradicate tax avoidance. But it is only when you start having the conversation that some countries go in the other direction, ”said Tove Maria Ryding, political manager at the European Network for Debt and Development in Brussels.

Taxes are just one of Ireland’s many attractions today [for multinational companies]. If this had happened 20 years ago it would have been more of a problem

The ease with which the world’s largest multinationals can channel their profits through these jurisdictions in order to reduce their overall tax burden has long been a complaint among major European economies losing the revenues generated in their countries.

However, new EU-wide taxes require the unanimous approval of all 27 member states, which veto governments that strictly protect their tax rights. As a result, EU finance ministries have struggled for years to agree on a bloc-wide policy to eradicate multinational tax avoidance.

In 2018, an alliance of smaller countries blocked plans for a European technology tax in favor of international talks at the OECD.

Earlier this year, countries like Ireland, Malta and Luxembourg opposed draft EU plans to force multinational companies with annual sales in excess of EUR 750 million to report how much profit and taxes they paid in all EU member states to have. The proposal, which is the subject of final negotiations between parliamentarians and national governments, is seen by its representatives as a first step towards documenting the extent of tax avoidance in Europe.

Brussels’s legal attacks on “sweet” tax regimes between governments and corporate giants have had mixed results. The European Commission suffered an embarrassing defeat last year when its landmark decision to force Apple to repay unpaid taxes of € 14.3 billion to the Irish government was annulled by the EU court. The Commission will appeal the decision, but in the meantime efforts to use EU law to combat multinational corporations have been hampered.

All of this helps explain why the US proposals were received relatively warmly: the agreement negotiated through the OECD would cover 135 countries and all the largest companies in the world, effectively removing the task from Brussels.

“The OECD measures mean that the EU does not need its own digital tax,” said an EU diplomat.

Paolo Gentiloni, EU economic commissioner, welcomed the US initiative on Tuesday and said a new global set of rules for taxing digital giants was the “best solution”.

“The second best solution is a European [digital tax] Suggestion. The hardest thing is to find national solutions, as is happening now, ”he said. However, he noted that the US plans were “not exactly the same” as those developed in Europe.

“The criteria will be crucial, but I think we can find very strong solutions together,” he said.

This leaves a lot of room for dispute over the details of how the system is implemented.

The biggest struggle is likely to be the level of the global minimum rate. The US proposes an effective corporate income tax of 21 percent. While the key interest rates are higher in the Netherlands and Luxembourg, the Irish corporate tax rate is 12.5 percent.

The Irish Treasury Department stressed that a global minimum rate had not yet been agreed in principle.

“Small countries like Ireland need to be able to use tax policies as a legitimate lever to offset the benefits of the size, resources and location of larger countries,” the Treasury Department said. “At the same time, we accept that there have to be limits to ensure that all competition is fair and sustainable.”

Bar chart of effective average corporate tax rates, 2019 (%) with small countries and low rates

Feargal O’Rourke, managing partner of PwC in Ireland, said Ireland and countries like Hungary with a quota of 9 percent would oppose an international minimum. “Ireland says we will fight our corner as expected,” said O’Rourke, noting Ireland stuck to the rate in good times and bad. . . It’s a symbol of stability and predictability. ”

However, he said there was “no panic” in Dublin about the possible erosion of Ireland’s tax advantage. Ministers believe the country’s highly skilled international workforce and longstanding relationships with multinational corporations will make it competitive even if its tax position changes.

“Taxes are just one of Ireland’s many attractions today [for multinational companies]. If this had happened 20 years ago it would have been more of a problem. “

The scope of the US proposals is controversial in parts of Europe: Member States like France and Italy have long wanted to impose international taxes on tech giants, but Germany could try to protect its powerful automakers, which were not covered by the original OECD proposals but would be dated US plan to be taken.

The definition on which the tax is levied could also be challenged, Ryding said: “One way to water down [the minimum tax proposal] It would be important to insist that the rules only apply to profits that do not comply with existing OECD profit-shifting policies. “

Ultimately, the OECD talks must lead to a broad consensus so that the coalitions of the countries have enough space to unite and to water down elements of the US proposals.

Ryding said that despite the desire of most governments to generate more tax revenue, the history of recent international tax negotiations suggests that the talks will result in a lowest common denominator deal.

“In the EU and the OECD, we don’t have coalitions of progressive countries demanding more, but alliances of tax havens who want less,” she said.

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