The call for European initiatives for more tax justice is not new; however, the path towards it has been rather stony. The topic also proved to be a long-burning issue during the hearings with the Commissioners-designate, whereby the main focus was on the digital tax, which failed at European level at the beginning of the year. A global approach in the fight against shifting profits and for a minimum tax rate at OECD level has entered a decisive phase and presents opportunities.
Together with the G20 countries, the OECD has - within the framework of the BEPS Initiative (Base Erosion Profit Shifting) - created a so-called Inclusive Framework, which meanwhile unites 134 countries behind the target of better and fairer international corporate taxation. Following initial measures, BEPS 2.0 is now pending. The OECD is pursuing 2 pillars: 1. the reallocation of corporate profits and 2. a global minimum tax rate for corporate profits. To debate a compromise on the first Pillar, the reallocation of corporate profits, the OECD invited to a Consultation on 09.10. A Consultation on Pillar 2, the minimum tax rate, shall take place before the end of this year. Political decisions are expected in 2020.
First Pillar: Reallocation of profits
In relation to the issue of tax, it has been rightly often criticised that the rule book is out of date: the focus is often on the place of production; however, in a digitalised world with globally active companies this regulation makes little sense. The OECD proposal increases the importance of the place of consumption. Hence, the so-called unified approach would mean that large digital players such as Google and Co. would pay more tax in Austria - even though they have no physical presence there, thus not “produce” in the classic sense. Initially, this shift sounds positive; however, its consequences are difficult to evaluate. After all, the same rule also applies to other companies, which previously had paid tax in Austria; for example Industrial companies that produce for end consumers, such as Red Bull.
Second Pillar: A global minimum tax rate
Even though the reallocation of corporate profits in favour of market states represents an answer to the digitisation of the economy, it does not yet ensure an adequate level of taxation. Donald Trump of all people has - with his tax reform 2018 - achieved minimum taxation for US companies. If one would apply the approach of the US President to the EU, one would require an “Income Inclusion Rule”, which says: if, for example the effective minimum tax rate is 18 percent and the subsidiary of an EU company in a tax haven only pays 3 percent tax, the EU country (country of domicile of the parent company) max tax the remaining 15 percent “by increasing”. For the system not to be undermined, clear (international) regulations are required to determine the tax base. A so-called “Undertaxed Payments Rule” would also ensure that the subsidiaries of foreign companies in the EU would no longer be able to transfer their profits to tax havens and that they would have to pay a minimum tax rate of for example 18 percent. The “Undertaxed Payments Rule” also prevents EU corporations from avoiding the minimum tax rate by moving their headquarters abroad (Corporate Inversion).
Outlook: the chances for a minimum tax rate are good
The minimum tax rate would not only make transferring company profits to tax havens significantly more difficult; the tax competition in the EU would in fact be “frozen”. It also puts pressure towards a harmonised Common Consolidated Corporate Tax Base in the EU - without harmonisation it would not be possible to objectively determine the effective level of tax. This would lay the foundation stone for a formula based profit allocation (overall group taxation) within the EU, which has been a long-term demand of NGOs, trade unions and the Chamber of Labour.
The political feasibility of the minimum tax rate has been assessed as high: from today’s point of view, due to the lack of noteworthy opponents, the minimum tax rate will easily find its way into the final resolution of the G20. The G20 resolution would put the “usual suspects” in the EU (Ireland, Luxembourg, Malta etc.) under increased pressure to agree to its implementation at EU level. However, an effective minimum tax rate in the EU must be properly defined to be effective. The rate level is here the decisive factor: the demand for 25 percent (Austrian level) will be difficult to achieve; however, minimum taxation must not be allowed to align itself with the taillights of the EU (ca. 10 percent in Hungary and Bulgaria). A conceivable option would be a graded tax rate - a higher one for developed economies, a lower one for catching up economies.