The transposition into European law of the OECD global minimum tax

, by Rosalie Vuillemot

All the versions of this article: [English] [français]

The transposition into European law of the OECD global minimum tax
Paolo Gentiloni, European Commissioner for Economy, during an EP session on enterprise taxation. Credits:

The minimum taxation of multinationals - decided within the framework of the OECD and at 15% of their turnover - is historic. However, it still needs to be implemented by the signatory countries. Within the European Union, this implementation has just been delayed for a year.

The adoption of a historic tax: the minimum of 15% of company turnover

The OECD/G20 Inclusive Framework on BEPS was introduced from 2015. Through this framework the State parties wish to combat domestic tax base erosion and profit shifting (BEPS). BEPS refers to planning strategies for corporate taxation to exploit the differences between national and international tax rules. This is done with a view to artificially shift profits to jurisdictions where the corporations have little activity, but to jurisdictions/states which provides for low taxation, resulting in a low or zero tax burden.

After the return of the United States to the negotiations on the inclusive BEPS framework, in July 2021 the OECD adopted the Declaration as a two-pillar solution to solve the tax challenges raised by the digitalization of the economy. These two pillars addressed the reform of international tax rules, on the one hand. On the other hand it dealt with the payment by companies of a fair share of tax wherever they operate. Last October, 137 OECD member jurisdictions accepted this agreement.

The content of the tax rules under pillar 2

Pillar 2 is based on the GloBE rules, which set the amount of minimum taxation for multinational companies whose turnover exceeds 750 million at 15%. A “supplementary tax” is imposed on profits made in any jurisdiction, provided that the effective tax rate there is lower than the minimum rate of 15%. This new device could bring in, according to the OECD, up to 150 billion dollars.

The OECD tax will replace national ‘GAFA taxes’

The 2019 French digital services tax applies to two types of digital services. Digital interfaces (or intermediation services) on the one hand, which allow a user located in France to be in contact with other users with a view to the delivery of goods or the provision of services. On the other hand, the sale of advertising services targeted by a platform, which is based on the data collected by the platform when users visit it.

France was not alone in adopting this kind of tax, since then Austria, Italy, and the United Kingdom have also adopted ‘national Gafa taxes’. However, the new OECD tax, after being accepted by national parliaments and once it comes into force (which is planned for 2023), will replace these national taxes.

The delayed transposition of this system into European Union law

On December 22, 2021, the European Commission proposed a directive transposing the OECD agreement. Taking up the elements of the OECD model legislation, there are some adjustments, to adapt it to EU law, taking into account the freedom of establishment.

The national ministers of finance, meeting as a Council of the EU on March 15, 2022, did not find a consensus on the text.

Poland, Sweden, Malta, and Estonia are particularly reluctant to this minimum tax, because they have based their economic development model on the fiscal attractiveness of their territory. A delayed transposition of OECD rules is therefore to be expected; the French Minister of Finance, Bruno Le Maire, referred in a press conference to a deadline extending until December 2023, where the entry into force of the text was initially scheduled for December 2022.

Following an agreement by the ministers at the Council of the European Union, the Council, bringing together the heads of government, the European Parliament, and the national parliaments will also have to ratify the text, which seems already complicated – the Swedish Parliament having already shown its disagreement with the text.

This delay demonstrates the difficulties that Member States have in reaching agreements in terms of tax policy. moreover, this is subject to complicated and lengthy procedures under European law: For instance, the rule of unanimity, which provides the little leeway for the supranational institutions to which the competence of intergovernmental actors (the Council and the Council of the EU) is preferred.

The increase in the competences of the EU in the field of direct taxation?

The EU had plans to adopt a digital tax before 2023, but the relaunch of negotiations within the OECD marked the end of the EU tax.

In recent years, the EU has taken a considerable number of measures to combat tax evasion. This can be explained by several factors: the fact that the EU wishes to be a major actor in this field on the international scene is one of them. However, the fact that public opinion has taken hold of this subject after various financial scandals (to name but one, the Panama Papers affair). The EU seizes, through measures on tax evasion, competences concerning taxation, which in principle must remain within the competence of the Member States.

A directive of 2018 provides for mandatory automatic exchange of information in the field of taxation for certain multinational cross-border businesses.

The anti-tax avoidance directive (ATAD 1) of 2016, transposed in France by the finance law for 2019, created legally binding anti-abuse measures which target the main forms of tax evasion practiced by large corporations. It includes rules relating to controlled foreign companies (CFC), interest limitation rules, a general anti-abuse clause, a framework for hybrid arrangements, as well as exit tax rules. Transparency rules to fight against fraud and tax evasion, implementing the OECD BEPS action plan, are also included. The ATAD 2 directive adds a few rules, in particular on hybrid imbalances with the tax systems of third countries (ATAD 1 created rules only between Member States).

The EU is also updating the list of non-cooperative tax jurisdictions.

In addition, the Commission also adopted in 2021 a communication on business taxation for the 21st century, which presents plans for a framework for business taxation in the EU, an ‘EU tax package for 2050’, as well as a tax program for the next two years.

The new Objective 55 adjustment package also contains an environmental tax, the Carbon Border Adjustment Mechanism (CBAM), adopted in March 2022, and providing for the taxation of products imported into the European Union if those do not respect European standards. The EU is also pushing for the introduction of ‘behavioral’ taxes, aimed at sanctioning certain behaviors as well as reinforcing certain policies (in this case, the environment). In doing so, the extraterritorial effect of Union law (imposing environmental obligations on companies established in third countries wishing to export products to the EU) and the desire to create a European model of values, which could export to other continents, are strengthened. Therefore, it is to appear as a pioneering player in international tax justice, that the EU wanted to see minimum taxation quickly transposed into its judicial order.

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