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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is European Commissioner for the Economy
The coming new year will mark a new dawn for the taxation of large multinationals. Rules setting a minimum level of taxation for these businesses will start applying in jurisdictions across the world.
This major development will finally put a floor under the harmful competition that, over the past four decades, has created a relentless downward spiral in statutory corporate tax rates worldwide.
Since 1980, these have decreased from an average of 40 to 23 per cent; in Europe the fall has been even greater, from 45 to just under 20 per cent. In many cases, additional sweeteners, preferential rates and unacceptable loopholes allowing profits to be shifted to zero or low-tax jurisdictions have resulted in effective tax rates well below those headline figures.
As the extent of such practices has come to light, the general public and owners of smaller businesses have become increasingly indignant.
The reform that is about to take effect is one of the two elements (or ‘Pillar 2’) at the basis of a historic breakthrough achieved in 2021 in the OECD’s so-called “inclusive framework”. This agreement was the outcome of years of painstaking international negotiations and an important victory for multilateralism.
It establishes a global minimum corporate effective tax rate of 15 per cent for multinational companies with annual revenues of more than €750mn. There are more than 140 countries on board — almost three quarters of all UN members, representing over 90 per cent of the global corporate tax base.
The EU has played a crucial role in spearheading this effort. And we are now leading the way in turning the 2021 agreement into reality. One year ago, we were among the first jurisdictions in the world to approve legislation implementing the global minimum tax. Today, almost all EU member states are ready to apply the new rules from the start of 2024. The European Commission will continue to monitor the timely and full implementation of this crucial reform. We stand ready to take action if needed to address any delays or inconsistencies.
The EU’s rapid move to enact the global minimum tax is spurring others to align their own laws. It is the responsibility of all governments to step up the pace of these efforts. We have also seen some zero or low-tax jurisdictions introducing or raising corporate income taxes and I trust that in 2024 we will see further — and where necessary, more ambitious — moves in this sense.
We will work with our partners around the world to encourage as swift and wide an application as possible of the new framework. This includes assisting developing countries in their implementation efforts with technical, financial, and capacity-building support.
At a time when public budgets are strained and the need to invest in the green, digital and social transitions is more pressing than ever, the global minimum tax rate will allow governments to raise much-needed additional revenues. The OECD estimates the annual gains for treasuries around the world at $220bn, or 9 per cent of global corporate tax revenues.
EU countries where the new framework is now set to come in to force will also enjoy the possibility of applying a top-up tax to companies that are part of the same group — if other jurisdictions in which they operate do not apply the minimum 15 per cent rate.
More than 4,000 large multinationals fall within the scope of this potential future top-up tax in the EU — an additional incentive for jurisdictions elsewhere to comply with the new rules.
Looking ahead, no less important is the other half (or ‘Pillar 1’) of the 2021 agreement, covering the reallocation between jurisdictions of taxing rights of the largest multinationals. This is about ensuring that these mega-firms pay tax wherever they generate their profits.
Last October, the OECD inclusive framework published a text of the multilateral convention needed to implement Pillar 1, reflecting the broad consensus achieved so far among members. It’s essential that — in line with the agreed, updated timeline — 2024 also sees a successful conclusion to the discussions on the few remaining open issues and the signature of this convention. This will allow us to move forward and to deliver the full benefits of this common path towards fair taxation.
Source: Economy - ft.com
