Wednesday, January 03, 2024

4,000+ big multinationals fall within new global tax regime

Paolo Gentiloni, EU Commissioner for Economy, says that the coming into force of new rules for big multinational firms in Europe and in jurisdictions around the world is a historic reform which marks a major step towards a fairer corporate taxation system.

He says the reforms have the potential to generate an extra $220bn annually — about 9% to help countries around the world, to fund crucial investments and high-quality public services.

Gentiloni says that since 1980 the rate of corporate taxes has fallen from an average of 40 to 23% and across Europe they have fallen from 45 to just under 20%. He says 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...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."

The OECD, which has 38 mainly advanced member countries, together with the Group of 20 leading advanced and emerging member countries, have been working on global business tax reform for more than a decade, succeded from 2021in getting the support of more than 140 countries — almost 75% of all UN members, representing over 90% of the global corporate tax base.

The reform has two parts: Pillar 2 and Pillar 2.

Pillar One applies to the biggest and most profitable MNEs and re-allocates part of their profit to the countries where they sell their products and provide their services, where their consumers are. Without this rule, these companies can earn significant profits in a market without paying much tax there.

Pillar 2 proposed a global minimum corporate effective tax rate of 15% for multinational companies with annual revenues of more than €750mn.

Frequently asked questions

The first group of countries to implement the global minimum tax from January include the 27 countries of the EU, UK, Norway, Australia, South Korea, Japan and Canada.

The EU countries include Ireland, Luxembourg, the Netherlands, together with Switzerland and Barbados which mainly has a 5.5% business rate.

"Pillar two only needs a critical mass of countries to implement it,” said Pascal Saint-Amans, the OECD’s former tax chief until January 2023. “Nobody has found a silver bullet where you can avoid it.”

Manal Corwin, head of tax at the OECD, told the Financial Times that tracking where additional revenue ended up in the early stages would represent only a “snapshot” of the reforms.

“This will shift over time,” she said. “The future footprint is the value of what’s being delivered.” Corwin said — distortions would be eliminated in the system and she expected more taxes to be paid “where economic activities take place.”

The OECD defines investment hubs as jurisdictions where inward foreign direct investment accounts for more than 150% of gross domestic product. These include jurisdictions such as Bermuda, the British Virgin Islands, Ireland, Jersey, Guernsey, Luxembourg, Netherlands, Switzerland and Singapore.

“The global minimum tax reduces profit shifting incentives and in doing so it improves the allocation of capital by increasing the importance of non-tax factors,” David Bradbury, deputy head of tax at an OECD, said on a webinar.

"Low-taxed profit (with an ETR [effective tax rate] below 15%) amounts to 36% of the profits of all MNEs (Multinational Enterprises) above the EUR 750mn turnover threshold globally:

74% of all profit in investment hubs is estimated to be low-taxed;

28% in high-income jurisdictions is estimated to be low-taxed;

19% in developing jurisdictions (low and lower-middle-income jurisdictions) is estimated to be low-taxed."

Corporate Tax Statistics 2023

Effective tax rates of MNEs: New evidence on global low-taxed profit

To help big multinationals adapt to Pillar Two’s complexities, 2024 returns won’t be due until 18 months after the end of that year.

2024: 92.5% of equities held by 10% wealthiest Americans
A record high concentration.

On New Year's Day, the European Commission issued a statement:

"The framework will bring greater fairness and stability to the tax landscape in the EU and globally, while making it more modern and better adapted to today's globalised, digital world. The entry into force of the minimum effective taxation rules, unanimously agreed by Member States in 2022, formalises the EU's implementation of the so-called ‘Pillar 2' rules agreed as part of the global deal on international tax reform in 2021.

While almost 140 jurisdictions worldwide have now signed up to those rules, the EU has been a front-runner in translating them into hard law. By lowering the incentive for businesses to shift profits to low-tax jurisdictions, Pillar 2 curbs the so-called "race to the bottom" — the battle between countries to lower their corporate income tax rates in order to attract investment. It is already delivering results, with a number of zero tax jurisdictions around the world having announced the introduction of a corporate income tax for the companies in scope."

December 2023: Ireland in 2023: Music and tax haven shenanigans

The real Irish GDP value in 2022 was €140bn, not the headline €506bn i.e. €27,200 per head or $28,600 compared with Denmark's $67,800 at current prices.