The agreement on the reform of the international tax regime for multinationals concluded by the G7 countries' Finance Ministers in early June has recently found the support of 132 of the 139 countries participating in the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS), a multilateral cooperation project to combat tax avoidance developed and led by the Organisation for Economic Co-operation and Development, in collaboration with the G20. In fact, on 1 July, 130 countries (later joined by two more jurisdictions) signed the "Declaration on a two-pillar solution to address the tax challenges arising from the digitisation of the economy", which brings together and specifies the reform measures discussed and approved in June by the G7 Finance Ministers.
Barbados, Estonia, Ireland, Kenya, Nigeria, Sri Lanka and Hungary are the seven countries that are still missing. Among them, as the reader will have noticed, are also three EU Member States - Estonia, Ireland and Hungary - known for imposing rather low corporate taxation (the rate is 12.5% in Ireland and 9% in Hungary). Their opposition to the compromise reached thanks to the coordination and negotiation work carried out since 2016 by the OECD - within the Inclusive Framework on BEPS - was not surprising: consider, by way of example, that Ireland has been reiterating its dissatisfaction - in particular with respect to the global minimum rate of 15% on multinationals' profits - since the G7 Finance Ministers' meeting in early June.
The same "Declaration on a two-pillar solution" was also endorsed by the G20 Finance Ministers and Central Banks Governors. At their meeting in Venice on 9 and 10 July, they expressed their satisfaction with the "historic agreement on a more stable and equitable international fiscal architecture" reached through multilateral cooperation. They urged the OECD/G20 Inclusive Framework to define the final technical details and the implementation plan of the new rules by October and invited those countries that were still sceptical (or strongly opposed) to join the agreement as soon as possible.
European Commissioner for Economy Gentiloni, who attended the Venice summit, said: "It is a victory for fiscal fairness, for social justice and for the multilateral system. But our work is not over. We have until October to finalise this agreement. I am optimistic that during this time we will also be able to reach a consensus among all EU Member States on this crucial issue". Indeed, a Commission spokesperson told the press that the Commission would continue to interact with Estonia, Ireland and Hungary and work to ensure that an internal EU consensus around the contents of the international agreement is reached by October. The hope is that, once the technical details are settled, the three opposing States will also be persuaded to sign it.
But what is the issue at stake? The Declaration signed on 1 July provides a two-pillar solution to the tax challenges posed by globalisation and the digitalisation of the economy, which have for years rendered the international tax rules enshrined in the existing network of bilateral international tax treaties totally inadequate. These rules have two fundamental weaknesses. First, they stipulate that the profits of a company can only be taxed in a country other than the one in which it has its headquarters if the company is to some extent established (i.e. physically present in the country). This might have made sense a hundred years ago, when doing business necessarily involved setting up factories and warehouses; today, however, in our digitalised world, large multinational companies can conduct huge business in countries where they have no physical presence. Secondly, and in conjunction with the first problem, most countries only tax the "domestic" revenues and profits of the multinational companies established there, and not those earned abroad. This means that a large part of the profits of multinationals - especially those that choose to set up in countries that offer very low corporate taxation - end up not being taxed, with losses estimated by the OECD at $100-240 billion a year for the coffers of States.
The solution to which 132 countries have given their approval is based, as already mentioned, on two pillars. The first pillar concerns the attribution of new taxation rights on multinationals to the countries in which they operate and sell their goods and services, regardless of their physical presence on national territory. According to the new rules collected under the so-called "First Pillar", multinational companies with global revenues exceeding 20 billion euro and a profit rate above 10% will see between 20 and 30% of their "residual profits" (profits exceeding 10%) taxed in the countries where their users and customers are located - i.e. where they sell their goods and/or services, regardless of whether they are physically established in those countries. In view of this, the countries signing the agreement will be obliged to eliminate from their legislation any "Digital Services Taxes" introduced in recent years (more than half of the European countries have now implemented or announced such taxes, including Italy).
The second pillar, on the other hand, concerns the establishment of a global minimum rate to be applied to multinational companies' profits. When the agreement identified in the OECD/G20 Inclusive Framework on BEPS is implemented - expected in 2023 - multinationals with annual revenues above €750 million will have their profits taxed at a minimum of 15% (the rate also agreed by G7 Finance Ministers), wherever they operate or are based.
Regarding the impact of these measures, the OECD estimates that the rules contained in the first pillar could grant States annual taxing rights on $100 billion of profit that has so far escaped taxation. The global minimum rate of 15%, on the other hand, is expected to generate $150 billion in additional tax revenue each year. More than valuable revenue, especially in light of the economic effects of the current COVID-19 pandemic.
But the compromise reached, presented here, did not satisfy everyone (and it is not just the seven countries that have not yet joined). Perhaps one of the most critical voices was Alex Cobham, President of the Tax Justice Network, an advocacy group working on the issue of tax avoidance and "cut-throat competition" between tax systems in corporate taxation, who said: "By settling for a rate below 25%, the G7 countries are telling their citizens and the world that they are willing to let cut-throat competition continue unabated. The opportunity to improve the lives of billions of people in one fell swoop rarely comes, but when history knocked today, the leaders of the world's richest countries turned their backs on it." The reason for this dissatisfaction is that a 25% tax rate would not only generate more tax revenue for States - $780 billion in additional tax revenue to be precise - but would also benefit the non-G7 countries more than the OECD-brokered deal. "The non-G7 countries would receive $355 billion under the more equitable approach we have proposed," Cobham continued, "whereas if the G7 were to press for a 15 per cent rate, as under the profoundly inequitable approach chosen by the OECD, it would leave the other countries with just $100 billion and guarantee $170 billion". In short: the compromise reached within the OECD/G20 Inclusive Framework on BEPS, under the impetus of the G7, which was the first to declare its support for the solution then chosen, would benefit the richest countries far more than all the others, thus proving to be very little "inclusive".
Translated by Irene Leonardi