Low-tax European countries prepare to fight US corporate tax plan

Low-tax European countries have responded positively to the Biden administration’s plans for a radical reform of global business taxation, although they will be the losers – but signaled that Washington can expect a fight over many of the details.

The proposal, which first surfaced last week, aims to break the deadlock in long-term global negotiations organized by the rich countries club of the OECD. This would give countries the power raise corporate taxes on US tech giants and other large multinationals; and introduce a minimum global corporate tax rate.

It would be a blow to Ireland, the Netherlands, Luxembourg, Malta and Cyprus, all popular bases for the world’s biggest companies, which have fiercely defended their right to set corporate tax at a low level. of their choice.

Despite this, Dublin said it was “in favor of a deal.” . . which can bring stability to the international fiscal framework ”, while Hans Vijlbrief, the Dutch Secretary of State for Finance, said the Biden plan was“ a big step towards finding global solutions and developing effective rules ” .

Luxembourg Finance Minister Pierre Gramegna said the US initiative would help create a “level playing field at the global level” and welcomed the renewed cooperation at the OECD.

“Few countries will ever criticize plans to end tax evasion. But it’s only when you start talking that some countries go the other way, ”said Tove Maria Ryding, Policy Officer at the European Network on Debt and Development in Brussels.

The ease with which the world’s largest multinationals can channel their profits through these jurisdictions to reduce their overall tax burden has long been a subject of complaint among major European economies which are losing revenue generated in their countries.

However, any new EU-wide tax requires the unanimous agreement of the 27 member states, giving a veto power to governments that fiercely protect their tax rights. As a result, EU finance ministries have struggled for years to agree on bloc-wide policies to eradicate multinational tax evasion.

In 2018, an alliance of small countries blocked plans for a European technology tax in favor of international negotiations at the OECD.

And earlier this year, countries like Ireland, Malta and Luxembourg opposed draft EU plans to force multinationals with more than € 750 million in annual turnover to declare profits and taxes they paid in all EU member states. The proposal, which is the subject of final negotiations between MEPs and national governments, is seen by its representatives as a first step towards documenting the extent of tax evasion in Europe.

Brussels’ legal assaults on “sweetheart” tax deals between governments and corporate giants have had mixed results. The European Commission has suffered a embarrassing defeat last year, when its landmark decision to force Apple to reimburse € 14.3 billion in unpaid taxes to the Irish government was overturned by the EU General Court. The committee will appeal the decision, but in the meantime efforts to use EU law to crack down on multinationals have been stalled.

All of this helps to explain why the US proposals were received relatively warmly: the agreement being negotiated through the OECD would cover 135 countries and all the largest companies in the world, effectively removing the task of Brussels.

“The OECD measures mean that the EU will not need its own digital tax,” said a European diplomat.

Paolo Gentiloni, European Commissioner for the Economy, on Tuesday welcomed the US initiative and said that a new set of global rules for the taxation of digital giants was the “best solution”.

“The second best solution is to have a [digital tax] proposal. The most difficult thing is to have national solutions and that is what is happening now, ”he declared. However, he noted that US plans were “not exactly the same” as those being developed in Europe.

“The criteria will be crucial but I think we can find some very solid common solutions,” he said.

This leaves a lot of room for dispute over the details of the implementation of the program.

The biggest battle will probably be the level of the overall minimum rate. The United States proposes an effective minimum corporate tax of 21 percent. While the Netherlands and Luxembourg have nominal rates higher than that, the corporate tax rate in Ireland is 12.5 percent.

The Irish Ministry of Finance stressed that an overall minimum rate had not yet been agreed in principle.

“Small countries, like Ireland, need to be able to use tax policy as a legitimate lever to offset the scale, resource and location advantages enjoyed by large countries,” the finance ministry said. “At the same time, we accept that there must be limits to ensure that any competition is fair and sustainable.”

Bar chart of average effective corporate tax rates, 2019 (%) showing small countries, low rates

Feargal O’Rourke, managing partner of PwC in Ireland, said an international minimum would be fought by Ireland and countries like Hungary, which has a 9 percent rate. “Ireland says ‘we’re going to fight our corner’ as you would expect,” O’Rourke said, noting that “in good times and bad, Ireland has kept up the pace. a symbol of stability and predictability ”.

However, he said, there was “no panic” in Dublin over the potential erosion of Ireland’s tax advantage. The ministers believe that the country’s highly skilled international workforce and its long-standing relationships with multinational companies will make it competitive even if its tax situation changes.

“Taxation is just one of Ireland’s many attractions. [for multinational companies]. If this had happened 20 years ago, it would have been more worrying.

The scope of the US proposals is controversial in parts of Europe: Member states like France and Italy have long wanted to impose international taxes on tech giants, but Germany may seek to protect its powerful automakers , which were not covered by the original OECD proposals. but would be struck by the American plan.

The definition of what the tax is levied on could also be challenged, Ryding said: “One way to dilute [the minimum tax proposal] would lobby for the rules to apply only to profits that are not in line with existing OECD profit shifting measures. “

Ultimately, the OECD talks will need to reach a broad consensus, leaving ample room for coalitions of countries to come together and water down elements of the US proposals.

Ryding said that despite the desire of most governments to generate more tax revenue, the history of recent international tax negotiations suggests that the talks will move towards a deal with the lowest common denominator.

“In the EU and the OECD, we don’t have coalitions of progressive countries asking for more, but alliances of tax havens who want less,” she said.

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