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Europe’s low-tax nations braced for struggle over US corporate tax plan

Europe’s low-tax nations have responded positively to the Biden administration’s plans for a radical reform of global corporate taxation, even though they will lose out — but signalled that Washington can expect a fight over much of the detail.

The proposal, which first emerged last week, seeks to break the deadlock in long-running global talks hosted by the OECD club of wealthy nations. It would give countries the power to raise corporate tax from US tech giants and other large multinationals, and introduce a global minimum corporate tax rate.

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

Despite this, Dublin said it was “in favour of an agreement . . . that can bring stability to the international tax framework”, while Hans Vijlbrief, the Netherlands state secretary for finance, said the Biden plan was a “huge step towards finding global solutions and developing effective rules”. 

Pierre Gramegna, Luxembourg’s finance minister, said the US initiative would help create a “global level playing field” and welcomed the renewed cooperation at the OECD. Malta and Cyprus have not commented.

“Few countries will ever criticise plans to root out tax avoidance. But it is only when you start walking the talk that some countries walk in the other direction,” said Tove Maria Ryding, policy manager at the European Network on Debt and Development in Brussels. 

The ease with which the world’s biggest multinationals can channel their profits through these jurisdictions to reduce their overall tax burden has long been a cause for complaint among major European economies that lose out on revenue generated in their countries.

However, any new EU-wide taxes require the unanimous agreement of all 27 member states, handing a veto to governments that are fiercely protective of their taxation rights. As a result, EU finance ministries have been struggling for years to agree on bloc-wide policies to root out multinational tax avoidance.

In 2018 an alliance of smaller countries blocked plans for a European tech tax in favour of holding international talks at the OECD.

And earlier this year countries including Ireland, Malta and Luxembourg opposed draft EU plans to force multinationals with more than €750m in annual turnover to report how much profit they made and tax they paid in all EU member states. The proposal, which is subject to final negotiations between MEPs and national governments, is seen by its exponents as a first step towards documenting the scale of tax avoidance in Europe. 

Brussels’ legal assaults on “sweetheart” tax arrangements between governments and corporate giants have had mixed results. The European Commission suffered an embarrassing defeat last year when its landmark decision to force Apple to repay €14.3bn in unpaid taxes to the Irish government was annulled by the EU’s general court. The commission will appeal against the decision, but in the meantime efforts to use EU law to crack down on multinationals have been stymied.

All this helps to explain why the US proposals were greeted relatively warmly: the agreement under negotiation through the OECD would cover 135 countries and all of the world’s largest corporations, in effect taking the task out of Brussels’ hands.

“The OECD measures mean the EU won’t need its own digital tax,” said an EU diplomat.

Paolo Gentiloni, EU economics commissioner, on Tuesday welcomed the US initiative and said a new set of global rules for the taxation of digital giants was the “best solution”. 

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

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

That leaves plenty of room for dispute over the details of how the scheme would be implemented.

The biggest battle is likely to be the level of the global minimum rate. The US proposes a 21 per cent effective minimum corporation tax. While the Netherlands and Luxembourg have headline rates higher than this, Ireland’s corporate tax rate stands at 12.5 per cent.

The Irish finance ministry stressed that a global minimum rate had yet to be agreed in principle.

“Small countries, such as Ireland, need to be able to use tax policy as a legitimate lever to compensate for advantages of scale, resources and location enjoyed by larger countries,” the finance ministry said. “At the same time, we accept that there need to be boundaries to ensure any competition is fair and sustainable.”

Feargal O’Rourke, managing partner of PwC in Ireland, said an international minimum would be resisted by Ireland and countries such as Hungary, which has a 9 per cent rate. “Ireland is saying ‘we’re going to fight our corner’, as you’d expect,” O’Rourke said, noting that “in good times and bad times Ireland held on to the rate . . . it’s a symbol of stability and predictability”. 

However, he said, there was “no panic” in Dublin about the potential erosion of Ireland’s tax advantage. Ministers believe the country’s highly skilled international workforce and longstanding relationships with multinational companies will make it competitive even if its tax position changes.

“Tax is now just one of the many points of attraction Ireland has [for multinational companies]. If this had happened 20 years ago it would have been more of a concern.”

The scope of the US proposals is contentious in parts of Europe: member states such as France and Italy have long wanted to impose international taxes on tech giants, but Germany could seek to protect its powerful carmakers, which were not covered by the initial OECD proposals but would be hit by the US plan.

The definition of what the tax is levied on could also be contested, Ryding said: “One way of watering down [the minimum tax proposal] would be to push for the rules to apply only to profits that are not compliant with existing OECD measures on profit shifting.”

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

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

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


Source: Economy - ft.com

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