Tax dodging by multinational groups cost countries worldwide tax revenues of annually 312 billion US-Dollars. The ongoing COVID-19 crisis and growing inequalities in Europe render it inacceptable that companies receive generous government support while at the same time minimizing their tax dues. Furthermore, international tax competition has resulted in a race to the bottom with respect to corporate taxation. Thus, countries are missing out on essential tax revenues to overcome the COVID-19 crisis and to finance the social-ecological transformation.

The two-pillar system of the OECD Agreement

After years of negotiations at the OECD level within the scope of the Inclusive Framework, an agreement, which can rightly be described as historic, was finally reached on 8 October 2021: 136 countries agreed on reforming the international tax system to curb global tax competition and to combat tax avoidance and evasion. The OECD agreement is based on a two-pillar system: while Pillar 1 revises countries’ taxing rights, Pillar 2 comprises the implementation of a global effective minimum tax for multinational enterprises. The planned reforms within the framework of the OECD agreement shall be implemented in 2023.

The Directive proposal on a minimum tax

On 22 December 2021, Commissioner for Economy Paolo Gentiloni, presented the eagerly awaited Proposal for a Directive, based on which the effective minimum level of taxation of 15 % (Pillar 2) shall be implemented in the European Union. The minimum tax shall apply to companies, which operate in the EU and generate an annual turnover exceeding 750 million Euro. The Commission’s Directive proposal follows the agreement at the OECD level in practically every detail: hence, it also includes the so-called substance-based carve-outs, the application of which can result in corporate effective tax rates below 15 %. For legal reasons under European law, however, the EU minimum tax shall also apply to purely domestic cases, whereby also enterprises’ domestic subsidiaries will be subject to the EU minimum tax, which amounts to a considerable tightening.

The position of AK

From AK’s point of view, the international tax reform within the framework of the OECD agreement is, in principle, to be welcomed as it represents a first important step towards tax justice. Moreover, the minimum tax can help to limit enterprises’ tax dodging practices as well as tax competition between countries. Since the EU Commission has not gone beyond the international agreement, the proposed directive is to be described as unambitious nonetheless.

Not least due to pressure from European low-tax countries such as Ireland and Hungary, the minimum level of taxation was capped at only 15 % and generous exceptions were included in the final agreement. The EU Tax Observatory has calculated that an increase of the minimum tax to 21 % would increase annual tax revenues in the EU to 170 billion Euro, thereby more than doubling them. However, the substance-based carve-outs will, in the first year, reduce the EU’s tax revenues from 83 to 64 billion Euro. From AK’s point of view, increasing the minimum tax rate is necessary. Hence, it would be pivotal to enshrine in the Directive the possibility of increasing the minimum tax rate in future – for example by employing an opting-out option. Apart from that, the far-reaching substance-based carve-outs should be abolished. Moreover, lowering the turnover threshold of 750 million Euro would also make sense in order to broaden the scope of the minimum tax. Lastly, tax experts emphasize that the harmonised tax base of the minimum tax might also be used as a basis for further tax Initiatives, such as the comprehensive tax concept BEFIT.

As the Directive proposal already represents a compromise, it is crucial that the minimum tax will not be further watered down as the political process continues. However, this risk exists as the implementation of the presented minimum tax directive requires unanimity in the Council. With this in mind, alternatives to unanimity – such as increased cooperation of individual Member States – should also be considered to ensure the effective implementation of the minimum tax in the EU.

Further information:

AK EUROPA: How to implement a minimum tax effectively in the EU!
AK EUROPA: Implementing an effective minimum tax rate in the EU as quickly as possible!
AK EUROPA Policy Brief: Effective Minimum Tax Implementation - Alternatives to Unanimity
European Commission: Transposition of international agreement on minimum taxation