Global minimum profit tax rate – an important stage victory

Dan Bădin iul. 13, 2021 0 comentarii
Dan Badin sursa Deloitte Romania

The agreement reached within the Organization for Economic Co-operation and Development (OECD) on the establishment of a global minimum profit tax of 15% for large companies, signed by more than 130 states, was described as “the most important agreement on international taxation concluded in a century ”and“ a colossal step towards greater tax justice ”. But the deal, which has also been backed by recent agreements reached at the G8 and then G20 levels, is still proving fragile, as it targets only one of the two pillars of the OECD’s international taxation initiative, the minimum tax on profits. The pillar that provides for the imposition of a tax on digital companies has not only not met the consensus of the great powers but also risks unbalancing relations between the European Union (EU) and the United States of America (USA).

The consensus in the OECD was reached after a decade of intense debate on international tax reform, with the aim of implementing a fair system of taxation of the profits of multinational companies for the benefit of all states that contribute to their achievement. But the new rules, which have been agreed upon within the organization, apply to a limited number of companies and bypass the field that, in recent years at least, has gained a dominant position globally.

Specifically, the signatory states agreed on a two-way tax reform focused on multinationals: one on an overall profit tax rate of at least 15%, and the other on a new distribution of multinational taxation rights between states. Thus, a state will be able to tax the profits obtained by a national company abroad if the tax paid there is less than 15%, to compensate for the difference. This rule applies to companies with a turnover of over EUR 750 million. Instead, the distribution of profit shares to the countries from which the revenues are obtained will be able to be requested, under certain conditions, only to the multinationals that generate over 20 billion euros in the global turnover and whose profitability is higher than 10%. Therefore, the benefits of the states from which the revenues are extracted will be limited.

Certain countries with profit tax rates below that stipulated in the agreement, including Ireland and Hungary, have refused to sign the convention, as it diminishes their competitive advantage from reduced taxation in attracting investors.

The signatories of the agreement gave their deadline until October 2021 to finalize the technical details and to prepare an effective implementation plan in 2023.

This initiative comes to stop that race to the bottom of the tax rate in which the states of the world have competed in the last 30 years, and will have as a natural consequence an alignment of national taxation rates at or above the 15% level.

The digital tax rekindles the conflict between the US and the EU

The initialing of the agreement is no doubt due to the fact that the new US leadership announced earlier this year that it supports the OECD’s initiative to impose a global minimum profit tax, after several years of opposition. But the final form of the deal was also influenced by the US administration, which continues to reject the application of a global digital tax, which would mainly affect the big US IT giants. Moreover, the Americans condition the maintenance of the agreement by the elimination of the digital tax in the countries that imposed it unilaterally and by the abandonment by the EU of the plans in this direction. US Treasury Secretary Janet Yellen has rejected the EU’s claim that the tax could be complementary to the global minimum income tax agreement.

On the other hand, Europe Commission’s Vice-President Margrethe Vestager recently said she welcomes the OECD agreement, but the EU will move forward with its digital tax, which has different objectives from what was set at the OECD meeting, and the scope “is more extended ”. In addition, European officials are beginning to reveal details about the future tax that would apply across the EU if no global agreement is reached. The application of a rate of 0.3% on the online sales of products and services of companies with an annual turnover of over 50 million euros operating in the common market,  is being circulated. Therefore, it is not only the technology giants that are targeted but many more companies.

For his part, French Finance Minister Bruno Le Maire announced at the G20 meeting that France (which unilaterally imposed a tax on the income of companies in the digital sector) is willing to waive the national tax as soon as one is implemented at the global level.

However, in order not to compromise plans to introduce a global minimum tax, European officials have been willing to postpone the digital tax announcement until the fall.

What could Romania gain from this?

In these global discussions, Romania has a rather the role of a spectator. However, the question remains whether these international agreements will also affect companies operating in our country.

For Romania, which has a profit tax of 16%, the impact of the OECD agreement on the minimum rate is almost non-existent. Romanian companies are not affected at all by the new provisions established globally, and for multinational companies operating on the local market it is possible to appear certain influences rather from potential internal reorganizations of multinational groups as a result of the introduction of the minimum tax. For example, the use of group companies located in districts with more permissive taxation may be waived, which could, at least in theory, lead to the maintenance of more activities or profits in Romania and, that consequently lead to more taxes paid locally. In addition, there could be positive effects for the state budget from the allocation of profits of large multinational companies that sell in Romania, without having a physical presence in the country. However, it is still premature to estimate this impact, given that the allocation mechanism to the countries where the revenues are generated has not yet been established.

A greater impact in Romania could have the application of a digital tax at the European level, if and when it will be implemented. However, we must take into account the fact that there may be Romanian companies in the digital sphere that should pay such a tax in Romania, but also abroad, if they operate cross-border.

In conclusion, the OECD agreement on the minimum tax is extremely important at the political level, even if it does not solve all the inequities in global taxation. Many details remain to be clarified and intense political and technical negotiations are expected in the coming period. Let us not forget, however, that the OECD has no legislative role and each state must approve and implement locally the legislation necessary for the practical application of the provisions contained in the agreement. It remains to be seen, therefore, whether there will be an alignment in the implementation of legislation in each signatory country, as well as whether there will be any differences from the OECD proposal. In addition, at least in the US-EU relationship, the thorny and unresolved issue of the digital tax remains, on which no agreement has been reached.

Translated from Romanian by Service For Life S.R.L.

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