G7 finance ministers have struck a historic deal to tax global firms at a minimum rate of 15 percent. For which large corporations and on what tax base it will be applied is not yet agreed, so many experts might remain unconvinced about the importance of what has actually been agreed. The experience of us elders is that if everything is not agreed, nothing is agreed.
On digital tax in a nutshell
Negotiations have been taking place at the OECD level since the launch of the BEPS project in 2013. The main goal was to introduce a new system of taxation, which was to deal with the growing phenomenon of business digitization in the 21st century.
This has in cases led to aggressive tax behavior by global corporations, including digital giants. The intention was to abandon traditional residence taxing and to direct the taxation of profits according to where intangible assets and customers are located, instead of traditional tax residence, the collection of which has often been misused. The OECD concept had two pillars from the beginning; the first dealt with the diversion of the focus of taxation from a traditional tax residence, and the second was to introduce a minimum amount of tax.
The EU was not satisfied with the pace of change, so in 2018 it proposed a digital tax of 3 percent of the European turnover of all digital giants. This proposal was not enthusiastically received in the US but did not receive the clear and necessary support in the EU; so individual European countries began to introduce a digital tax unilaterally.
In my opinion, Slovakia did not join them with a reasonable explanation. The fiscal revenue from such a new tax in our country would not be adequate in comparison with the costs of its implementation. According to the latest information, it looks like the minimum tax agreement will focus on the taxation of profits, so the digital tax as such is not addressed in the global agreement.
In January this year, the OECD published its blueprint on both pillars of the new taxation system and called for a public debate. Hundreds of experts have worked on the concept for many years. Both pillars are mentioned in the G7 deal focusing on Pillar 2.
The EU Solution
I know from experience that agreeing on uniform rules for determining the tax base is difficult. I myself participated in an EU project with the complicated name of CCCTB (common consolidated corporate tax base), which has been worked on for more than 10 years.
I remember that at the IFA Congress in 2006, as tax experts we were unable to agree on whether the uniform tax base should be based on accounting profit or be specifically designed. Finally, a combination was created, with the consolidated tax base taking into account three factors in each member state (capital, number of employees/labor costs and volume of sales).
After being proposed in 2011, it did not pass the European Parliament since it was vetoed by a few member states. Even though the proposal did not require a uniform minimum tax rate at all, this was left to the member states to decide and therefore to compete. Although the last time European politicians tried to revive CCCTB in 2016, it will probably not survive.
This is also indicated by the fact that on May 18, 2021, the European Commission published the Communication on Business Taxation for the 21st Century. The paper sets out both a long-term vision to provide a fair and sustainable business environment and EU tax system; and a tax agenda with targeted measures that promote productive investment and entrepreneurship in Europe after a pandemic and ensure effective taxation.
It includes a new income taxation framework for businesses in Europe (Business in Europe: Framework for Income Taxation or BEFIT). This should be a single corporate tax rulebook for the EU, based on the key features of a common tax base and allocation of profits between member states based on a formulary apportionment. This new proposal will replace the pending CCCTB model. Below find an illustration from Wikipedia, which in a very simple way explains the complexity of the formula to be applied under the old CCCTB model.
BEFIT should build on progress in the global discussions, where these concepts are already present, through the use of a formula for the partial reallocation of profits under Pillar 1, and common rules for calculating the tax base for the purposes of applying Pillar 2.
The game may still end in a stalemate
The planned tax reforms are both ambitious and complex, it is already clear that not all will be enforceable. However, following the G7 agreement to introduce a global minimum tax rate of 15 percent, the adoption of BEFIT is more realistic than the introduction of a new digital tax originally intended by EU.
Last but not least, if global elites are unable to agree on all important details, the game may end in a stalemate. Players do not always realise that they are playing multidimensional chess. Where intuition is not enough, there are more than two moving pieces and individual moves are not connected.
12. Jun 2021 at 9:17 | Renáta Blahová