Taxing Times

Editor’s Blog: Produced in collaboration with the EU Buzz team 

Now that a global corporate tax rate has finally been agreed, after years of discussions on alleged and actual tax avoidance by international multinationals and online technology companies, can we expect imminent changes in Europe? 

Taxes are paid on trading transactions and both trade and tax rules are becoming increasingly complex as the divergence from everyday goods and services continues. Digital transactions, cryptocurrencies, encrypted data flows and varying low tax regimes or tax avoidance mechanisms, have led to trade wars and retaliation, as well as to a labelling of global businesses as unscrupulous. Even the role of the World Trade Organization (WTO) is being called into question as its dispute settlement mechanisms become increasingly paralysed. Stability is in short supply at the moment. Such actions benefit no one. The global focus must be towards reinvigorating growth and sustainable trade, and towards implementing tax systems intended to create a fairness policy, with greater transparency, from which everyone can gain.

The European Union both succeeds and fails in the area of tax policy. A block of 27 countries, each country has its own tax policy. There is no single market for tax and no EU fiscal policy. Tax policy is not a competence of the European Union. Ireland, Hungary and Cyprus all have corporation tax rates of below 15%, which makes them much more attractive to business than other Member States. As a result, these countries have seen phenomenal success and attracted many new businesses, especially from the technology sector. This might all be about to change if the global tax rules come into play. 

Whilst the EU itself does not set a common tax regime for Europe, it does negotiate on behalf of all the EU27 on global issues, and this is its strength- but only if and when it can get all 27 on board! The European Union has expertise and knowledge on economic, technology, legal and tax reforms which other countries in the G7 value. They are adept at compromise, which during global negotiations is always an asset. It was therefore not a surprise that on 5 June 2021, at the G7 Summit of finance ministers in London, plans were adopted to put in place a global tax collection system to make the global giants pay their fair share of taxes – After all, the European Union has been trying to tax certain global conglomerates since they put their feet on the European pitch and then refused to play the game on Brussel’s terms. 

The new tax reforms have two pillars: The first allows countries to tax some of the profits made by large global corporations based on their revenue generated in that country and not where the business is located for tax purposes. Such countries will be able to impose new taxing rights on at least 20% of the profits exceeding a 10% margin for the largest companies. The second pillar implements an internationally agreed minimum global corporation tax rate which the G7 set at “at least” 15%. 

Pillar one is anticipated to affect around 100 companies and pillar two up to 8,000 multinationals. Last October, the OECD estimated that €66.5bn in additional tax revenues each year could be recovered under the new reforms. The EU Tax Observatory has analysed that companies such as oil entities BP, Shell, Iberdrola and Repsol, mining firm Anglo American, telecoms firm BT, and banks such as HSBC, Barclays and Santander could all be affected. 

Ironically for the European negotiators seeking to pull in substantial funds from the big US tech companies, the levels set were above those for some of the giants like Amazon, who will, this time at least, escape the reforms. No doubt this has angered many in Brussels, and may yet lead to the EU demanding a broader scope so that more global tech companies fall into its tax basket. 

Negotiations will still continue also amongst Brazil, Russia, India and China who may yet challenge the agreement either to protect their companies or in order to collect more revenue. And, in traditional EU style, the implications of “at least”  still has to be clearly defined. Nevertheless, EU finance ministers believe the G7 deal will mean it will have unity even from its low-tax Member States and tax experts have shared that if there is a global consensus on the rules, then any avoidance will be difficult.

There will be no “get rich quick” scheme here for global governments who are looking to increase tax revenue to off set the pandemic spending. This deal is unlikely to be finalised and put into legal practice, alongside the necessary revenue collection mechanisms, for several years yet. For now the only mechanism in place is the digital services taxes to support the empty purses of governments and to keep the global conglomerates in check! 

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