Insight
The G7 corporate tax deal: Why the EU should curb its enthusiasm by Zach Meyers, 9 June 2021
The recent G7 deal will not bolster the European Commission’s broader efforts to fight aggressive tax practices. The Commission needs political realism and more modest aims to make headway. International tax does not get more exciting. The European Commission has spent many years trying to tackle some EU member-states’ tolerance for aggressive tax practices: the Commission recently cited evidence that Europe loses between €35-70 billion in corporate tax avoidance each year and that 80 per cent of profits shifted in the EU are moved to EU-based tax havens, like Ireland, Luxembourg and the Netherlands. The Commission’s past attempts to address avoidance have been repeatedly thwarted by the need for unanimity among member-states on tax decisions. But times are changing. The G7, a group of large countries with developed economies, now supports a global minimum corporate tax rate; and some previously obstructionist EU member-states, like the Netherlands and Luxembourg, are rethinking their approach to corporate tax policy. The Commission plans to capitalise on this momentum and push forward an ambitious new corporate tax agenda. But EU officials underestimate the task ahead. More modest reforms will deliver better progress. As I have previously explained, the international tax agenda is currently dominated by OECD negotiations over two proposals. The first is a global minimum tax rate, which should reduce incentives for multinationals to book profits in low-tax countries. The second is a reallocation of taxing rights between countries, so that the largest multinationals would pay some corporation tax in the countries where they make sales – not just the countries where they book profits. On June 5th 2021, the G7 backed both proposals. The G7 will now seek agreement among the G20, a broader and more diverse group of countries, and then among countries participating in the current OECD discussions. Most countries will engage with the proposals rather than rejecting them. However, there are still two big hurdles to clear. The first concerns the minimum tax rate. Globally, the minimum tax proposal will work without unanimous agreement because it makes low-tax models far less attractive. However, resistance from some EU member-states could still make it hard to introduce in the EU. The Commission wants to implement any global minimum tax through EU laws. There are good reasons for this approach. The European Court of Justice (ECJ) previously examined whether one EU member-state could stop its companies benefiting from another EU member-state’s lower tax rates (effectively creating a minimum CER INSIGHT: The G7 corporate tax deal: why the EU should curb its enthusiasm 9 June 2021
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