On Wednesday, December 22nd, the European Commission proposed a new directive guaranteeing a minimum applicable tax rate affecting the global activities of large multinational groups.
The European Commission’s proposal on a minimum corporate tax was pretty quick in following up the global deal on a 15% minimum tax rate for companies, projected by our institutional partner OECD and accepted in October 2021 by the Group of Twenty (G20), an intergovernmental forum convening twenty member countries representing the largest world economies. The aim is to end the practices of many multinationals that use regulatory differences to evade hundreds of millions of euros in taxes legally.
Taking the words of European Commissioner for Economy Paolo Gentiloni: “In October of this year, 137 countries supported a historic multilateral agreement to transform global corporate taxation, addressing longstanding injustices while preserving competitiveness. Just two months later, we are taking the first step to put an end to the tax race to the bottom that harms the European Union and its economies. The directive we are putting forward will ensure that the new 15% minimum effective tax rate for large companies will be applied in a way that is fully compatible with EU law. We will follow up with a second directive next summer to implement the other pillar of the agreement on the reallocation of taxing rights once the related multilateral convention has been signed.”
The new rules would apply to any domestic or international large group whose branches or subsidiaries operate in (at least one of) the EU’s member countries. Of course, they also ensure that adequate measures (in the form of top-up taxation) are taken if the parent company is based in a country that hasn’t implemented equivalent rules. The “EU minimum corporate tax” law will apply to any company with combined revenues exceeding 750 million euros a year. The law aims to limit the downward competition on tax rates that characterised the fiscal policies of several countries in recent decades.
As mentioned by Commissioner Gentiloni, the EU minimum corporate tax proposal only deals with one of the two measures that OECD proposed: the first pillar of the OECD proposal, which is about taxing rights reallocation, will be implemented by a second law, scheduled for mid-2022 and aimed to address the other part of the OECD and G20 agreement on how the taxation of corporate profits of the largest and most profitable multinationals is shared amongst countries.
“By moving quickly to align with the far-reaching OECD agreement, Europe is playing its full part in creating a fairer global system for corporate taxation.” explained the Commission’s Executive Vice-President for an Economy that Works for People, Commissioner Valdis Dombrovskis. “This is particularly important at a time when we need to increase public financing for fair, sustainable growth and investment and meet public financing needs too, both for tackling the pandemic’s aftermath and driving forward the green and digital transitions. Putting the OECD agreement on minimum effective taxation into EU law will be vital for fighting tax avoidance and evasion while preventing a ‘race to the bottom’ with unhealthy tax competition between countries. It is a major step forward for our fair taxation agenda.”
Taxation systems haven’t changed much since the last decades of the 20th Century, and many European countries still stick to outdated regulations that no longer suit governmental needs and taxpayers expectations. Therefore, in 2021 Re-Imagine Europa established a Task Force on “An Ideal Fiscal System for the 21st Century” to build a shared vision and develop the blueprint for an ideal fiscal system and a fairer and more competitive economic model for Europe in the 21st Century.