Agreement on international corporate tax reform is imminent. Tomorrow, 8 October, the plenary meeting of the OECD/G20 Inclusive Forum on BEPS will take place. The OECD Inclusive Framework is expected to seal the final text tomorrow. This agreement is then expected to be endorsed by G20 Finance Ministers and Central Bank Governors on 13 October and further endorsed during the G20 Summit on 30-31 October.
The most talked about part of the agreement is the global minimum tax. Strictly speaking, however, this is not a minimum tax, but rather a top-up tax for foreign subsidiaries of large corporations. Under the so-called income inclusion rule, the income of foreign subsidiaries is taxed at the parent company. EU member states can implement it even without European agreement, as long as they include both domestic and foreign subsidiaries.
The final decision in the OECD Inclusive Framework is taken by consensus, unanimity is not required. On 1 July, 130 member jurisdictions had agreed to a provisional agreement. The EU member states Ireland, Hungary and Estonia are three of the then nine countries that refused to sign up to the agreement in July. They demanded concessions in order to be able to agree to the final deal. Ireland was able to achieve a considerable weakening of the original text in this way: instead of an effective minimum tax rate of “at least 15 percent”, Ireland was apparently able to have the word “at least” deleted. US President Biden had originally proposed an effective minimum tax rate of 21%; the wording “at least 15 percent” was already a concession to low-tax countries. Cyprus is not a member of the OECD Inclusive Framework.
The international corporate tax reform consists of two pillars: Pillar I regulates the redistribution of taxing rights for part of the excess profits of multinational companies. Pillar II establishes the minimum taxation, in particular the effective tax rate as well as the tax base. The minimum effective tax rate is to apply to large companies with a consolidated group turnover of more than € 750 million.
MEP Sven Giegold, financial and economic policy spokesperson of the Greens/EFA group commented:
“An international agreement on a common corporate tax reform is a major step forward. The decades-long blockade of global tax cooperation is finally being resolved. This agreement heralds a new era of global tax cooperation. The current tax race to the bottom is ruinous and exacerbates global inequalities.
However, it is also clear that while this agreement is an important step forward, it does not yet bring us to the finish line. The problem of tax avoidance by companies and tax evasion by the wealthy persists. The need for decisive action was highlighted again by the Pandora Papers. We are now getting rules for the largest corporations worldwide but not for letterbox companies. We need an effective minimum tax rate for all companies, not only for the largest corporations. All shell companies must also pay their fair share to society. Setting the effective minimum tax at 15 percent is a setback for this important tax justice project, because we need more ambition in international corporate taxation.
The problem of the monopolisation of the digital economy is not solved with this agreement. Taxing the digital economy is central to being able to finance investments to future-proof our economy – also through the EU budget. Although the market shares of Google, Netflix and Co. are considerable, their tax contributions in Europe will remain small even with the minimum tax. We must not apply double standards of taxation between the analogue and the digital economy. The relatively small redistribution of excess profits to the countries in which the large companies hold significant market shares is also not satisfactory. Global tax justice does not yet get the attention it deserves in this agreement.
The Pandora Papers show that we have only limited rule of law in the tax area, which applies to some and not to others. We need to build a fairer tax system to strengthen people’s trust in our democratic institutions.”
A legal study by the renowned international tax professor Dr. Joachim English shows that the G20/OECD deal can be implemented in Europe without unanimity of member states. I commissioned the study. https://sven-giegold.de/steuerrechtliches-gutachten-prof-englisch-legal-study/
With a minimum tax rate of 21%, the EU would raise about €100 billion extra in 2021. A change from 21% to 15% would halve the additional tax revenue in the EU. Based on a study by the EU Tax Observatory on the revenues from an effective minimum corporate tax rate of 25, 21 or 15 per cent: https://www.taxobservatory.eu/wp-content/uploads/2021/06/EUTO2021-1.pdf