After the Covid-19 pandemic and a peak in public deficits, tax reform seems to be high on the agenda for many of the world’s most important players, especially President Biden, but also the OECD and the EU.
US President’s proposal
President Biden is interested in introducing a new (consolidated) global tax framework as opposed to a sporadic domestic change (higher domestic tax rates). The two-pillar approach proposed by the OECD was adopted by Biden. It is based on finding a fair “tax right” balance between the countries and at the same time setting a new global minimum rate that would address the “exit” of technology and other conglomerates in tax havens.
The president’s proposal to introduce a worldwide minimum tax rate is not new. The ability of multinationals to shift profits overseas has long been a pressing concern on the global agenda, with economists warning of billions of dollars being shifted annually. Large income / source countries like the US, UK, France and Germany are constantly losing to low tax countries selected by companies through a tax haven parade.
Negotiations in the OECD forum
A “follow the money” approach is likely to emerge as a future consensus from the ongoing negotiations on tax reform in the OECD. MNEs / tech companies will be forced to pay a tax bill to national governments based on the revenue generated in a country rather than based on where the company is based.
The US is considering introducing a worldwide minimum tax rate. The current tax rate is 21%, which is also the average tax rate of the EU-OECD countries. The US proposal may be more convenient for the larger countries, which may have quite high corporate tax rates compared to countries with lower tax rates. For example, certain EU legal systems currently apply tax rates of only 9%. In particular, Biden’s recent proposal on minimum tax rates is aimed primarily at large multinational corporations. It can be considered unlikely to have any impact on retail customers.
Tax reform plans of the EU Commission
Tax reform plans were also announced by the EU Commission on May 18, 2021 via the communication channel “Communication on corporate taxation for the 21st century”. Its content makes us understand that legislative proposals are in the pipeline.
Here, too, the EU Commission’s proposals come during a recovery phase after COVID-19. The Commission is putting together a tax agenda for the next two years aimed at effective taxation within the EU while aiming at growth and sustainability for business and entrepreneurship.
Problems addressed by the Commission
The communication addresses issues such as the extraordinary economic crisis in the EU due to the public health challenges posed by COVID-19 and the acceleration of digitization, while also shedding light on the corporate tax system.
Specifically, it notes that the current international tax system is based on outdated principles of tax residence and tax source. It has not synchronized itself with the developments of globalization and digitization, or with modern business realities.
The fact that there are 27 different national corporate tax systems within the EU creates complexity for companies. This applies in particular to EU SMEs, start-ups and other companies that operate across borders in the internal market and want to expand. This complexity hinders investment, growth and the competitiveness of the EU.
The EU Commission highlights another problem that, although corporate income is taxed at the national level, business models are becoming more and more international, complex and digital. This creates high compliance costs for companies and risks of double taxation. The tax system is further undermined by some companies exploiting loopholes between tax systems through aggressive tax planning. This makes it difficult for citizens to know how much these companies are actually paying in taxes and creates suspicion.
The communication creates a new framework for corporate taxation in the EU that promotes a business-friendly environment, reduces administrative burdens and removes tax obstacles in the internal market.
The “Businesses in Europe: Framework for Income Taxation“(Or BEFIT)” will create a uniform corporate tax regime for the EU based on a formulaic breakdown (tax rates would continue to be set nationally) and a common tax base to reduce tax avoidance and compliance costs. It is scheduled to be introduced in 2023.
The Commission will propose the following targeted initiatives:
- Remedial measures, especially for SMEs – recommendation on domestic claims handling – (published) – Loss carry-back mechanism for healthy companies (which were profitable in the years before the pandemic) at least to the previous financial year to ensure that public money goes only to companies affected by the pandemic. Losses in 2020 and 2021 must be offset against tax before 2020 with a limit of € 3 million per loss-making financial year.
- Proposal for a Debt Equity Bias Reduction Allowance (DEBRA) – (proposal expected by Q1 2022) – Providing a “notional” interest allowance that allows for a deduction from the assumed equity compensation, thereby encouraging companies not to accumulate debt that could lead to large waves of bankruptcies that would affect the EU as a whole.
- Increased public transparency / Annual publication of the effective tax rate of certain large companies operating in the EU – (Proposal expected in 2022) – Public scrutiny in cases of aggressive tax planning and better overview by political decision-makers of the tax levies of the large MNEs in the EU.
- New measures to combat tax avoidance against the use of letterbox companies – (proposal expected by Q4 2021) – New monitoring and reporting requirements for better oversight and response by tax authorities to aggressive tax planning deployed through the use of letterbox companies and agreements with little or no substance and economic activity.
The EU Commission will continue its work on the above proposals, which aim to achieve a fairer distribution of taxation rights between Member States while supporting businesses and entrepreneurs to grow and expand in the single market in the 21st century. At the global level, like President Biden, she is examining the introduction of an effective minimum taxation system in order to bring the reform of the international tax system one step closer.
Global tax reform could be given the inequalities of different tax systems and economies (i.e. countries with heavy industry, agriculture, shipping, export, etc). It remains to be seen what the tax carpet will look like over the next decade, but the momentum towards a global minimum tax rate has never been so strong.
Originally published by IFLR1000.
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