On 1 July 2021, 130 OECD countries signed a declaration, in which they agreed on establishing a new framework for international tax reform for multinational companies.
What has been agreed?
Under the OECD Inclusive Framework on BEPS, 130 signatory countries are planning to reform their national tax systems. On the one hand, it is the intention to redistribute the global tax revenue (Pillar 1). Until now, companies have paid tax in particular in their country of residence. In the future, taxation shall to a greater degree depend on where companies operate and generate their turnover. Apple or Google would then have to pay more taxes in Europe, while European multinationals such as Volkswagen or Red Bull would have to increase their tax payments in countries such as China or the USA.
On the other hand, an effective minimum taxation of at least 15 percent, called “GloBE”, short for Global Anti-Base Erosion (Pillar 2) shall be levied on the profits of multinationals. In particular the GloBE minimum corporate tax rate shall sustainably alter the international tax system. The minimum tax rate reduces the incentive to shift profits to low tax countries – hence, it ensures that even in a “zero tax” haven, profits will be effectively taxed with the agreed effective 15 (or more) percent. Thus, if a corporation, having a subsidiary abroad, is paying tax under the agreed minimum tax rate, the home state will be able to tax and top up the difference up to the minimum tax rate. In doing so, any profit shifting would be no longer be an attractive option for companies.
Implemented to its full extent, this would also result in significantly more tax justice at international level and a less attractive tax race to the bottom. International effective corporate minimum taxation also addresses taxation problems, which result from digitalisation and how to tax intangible assets. Companies, with an annual turnover of 750 million plus euros, will fall under this new taxation rules. As stated by experts, this will affect 7,000 to 8,000 businesses worldwide. According to OECD, this will probably result in total additional income of about $ 150 billion p.a.
The huge dimension of the agreement is confirmed by international voices: US-President Joe Biden declared it would make the global economy "more equitable for workers and middle class families in the United States and around the world". France’s Minister of the Economy and Finance, Bruno Le Maire, said it was the most important international tax agreement in decades.
What happens next? From Declaration of Intent to effective right
However, one must not ignore the fact that the Declaration by the 130 OECD countries is not legally binding. It serves first and foremost the international coordination of legislative measures yet to be taken. Whether GloBE will indeed be successful depends on whether and how many of the measures will be passed into European and national legislation. The Agreement shall already come into force in 2023. This is very ambitious if one looks at European legislative processes. The Minimum tax rate shall be implemented by means of a Directive. Due to the unanimity required in tax issues, the (veto-) power of individual Member States should not be underestimated. After all, four EU countries have not signed the Declaration, namely Cyprus, Estonia, Ireland and Hungary. This still requires some persuasive efforts. However, if these fail, the time has come to contemplate alternatives to unanimity. A possible way out in case of a blockade would be an intensified cooperation by Member States or national stipulations by willing Member States. Which option are open to the Commission, shall be debated on 13 October 2021 during an AK EUROPA webinar.
AK EUROPA Position Paper: Towards more efficient and democratic decision making in EU tax policy
AK EUROPA Webinar: Effective Minimum Tax Rate Implementation in the EU: Why and How
AK EUROPA Campaign: Make Multinationals Pay
AK EUROPA Policy Brief: Digitalisation and Taxation
AK EUROPA: US Plans on corporate taxation
AK Study: Implementing an international effective Minimum Tax in the EU