Multinational corporations in the crosshairs of global tax authorities

Last weekend, the G7 countries reached a historic agreement to introduce changes to taxes imposed on multinational corporations. The idea, endorsed by the United States, Japan, Germany, France, the United Kingdom, Italy and Canada, is to get large companies to contribute more, and to restrict the practice of “tax planning” on the basis of shifting profits and expenses back and forth between different national jurisdictions.

It is a victory for Joe Biden, the president of the United States, and his platform to increase the tax bill for the wealthy as a way to increase public investment and offset the growth of inequality in the developed world in recent decades.

On the subject, a study recently launched by the European Union Tax Observatory – an independent think tank based at the Paris School of Economics dedicated to taxation – estimates how much EU countries would earn from the minimum international corporate income tax.

Going straight to the numbers, it would be 170 billion euros (1.04 trillion R$) annually at a rate of 25%, 100 billion euros (610 billion R$) at a rate of 21%, and about half of the latter at a rate of 15%.

These figures are derived from a simulation of an international agreement where each country collects a “tax deficit” from its own multinational corporations, that is, those in it.

In the authors example (Mona Barak, Theresa Neff, Paul Emmanuel Schock, Gabriel Zucman), if a German company pays a 10% income tax on its profits earned in Singapore, Germany will charge an additional 15% on those profits (assuming 25% is minimum income tax).

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Simply put, each country will impose an additional income tax on its multinational corporations so that they all contribute at least 25% of their total profits.

According to the authors, the €170 billion represents more than half of the EU’s corporate income tax, and 12% of the bloc’s spending on health. So it is a huge addition to revenue.

Interestingly, if the international agreement on minimum corporate income taxes were limited to the European Union, the bloc would generate even greater profits (at a rate of 25%), which could reach 200 billion euros (1.22 trillion RRL).

The reason is that the EU would gain the entire tax deficit of its multinational corporations, in addition to the tax deficit associated with the profits of multinational corporations from outside the bloc which is implemented in the EU countries. In the authors’ example, Germany would tax a British multinational that had 20% of its sales in German territory in an amount equal to 20% of its tax deficit. And this, for the European Union as a whole, will add 30 billion euros to the 170 billion already mentioned.

This fact, for the authors, suggests that the greatest revenue potential is in companies in the EU itself. Therefore, the bloc must first of all “police” its multinational companies.

The authors note that the same kind of gains from leaping forward in imposing a minimum income tax on multinational corporations (the EU gains more in a bloc-restricted agreement than in a global agreement) can also accrue with individual nations.

The idea is the same. The first country to adopt this practice unilaterally adds to the tax credit of its multinational corporations the tax deficit corresponding to the operation of multinational corporations of other countries in its territory. Remember that if all countries join at the same time, the total tax deficit of a multinational company goes to the host country.

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According to the study’s calculations, a “first mover” European country (which moves first) in terms of minimum income tax for multinational corporations could increase its collection with this tax by about 70%.

The authors consider general agreement to be a far preferable solution because it better distributes the pool of tax deficits for multinational corporations. However, they note that the potential payoff of being a “first mover” in this area is a mechanism that might make any country in particular want to be left behind, spurring a broader or even global agreement.

For them, a country’s rejection of international harmonization on corporate income tax is not a sustainable position, precisely because of the risk of being left out of the pie of the global tax deficit.

Fernando Dantas is a Broadcast columnist ([email protected])

This column was published on Broadcast on 6/8/2021 on Tuesday.

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