Can new EU corporate tax rules make big business pay its fair share?

The logistics center of online merchant Amazon in Lauwin-Planque, northern France. - Copyright Michel spingler/AP

Published on 05/01/2024 - 12:27•Updated 15:56

A landmark global deal setting a minimum corporate tax rate of 15% on multinational companies came into force in the European Union on 1 January.

The EU has for years tried to flex its muscles on corporate tax evasion by introducing a raft of new laws and lodging high-profile court cases against multinationals.

But some of its own member states - such as Ireland, Luxembourg and Cyprus - have continued to allow high-profit companies to dodge both taxes and scrutiny. Profit shifting worldwide has also remained high, causing losses worth billions of euros for the continent while economic inequality deepens.

Now, companies with revenues of at least €750 million active in any of the 27 EU states will face a minimum corporate tax rate of 15%. The bloc’s economy commissioner Paolo Gentiloni described the new year rules as "a new dawn for the taxation of large multinationals".

The move is part of a sweeping overhaul of the global tax system agreed by some 140 Organisation for Economic Co-operation and Development (OECD) countries in 2021 after a decade of negotiations, and aims to crack down on governments that slash their corporate tax bills to attract investment.

Other countries such as the UK, Norway, Australia, Japan and Canada are also implementing the measures.

While the new interlocking rules have been hailed as groundbreaking, experts told Euronews there is a need to close crucial loopholes to ensure big business is held accountable.

A ‘revolution’ in tax justice

The OECD deal consists of two pillars, the first of which aims to ensure companies pay tax where they do business. The second pillar sets the global minimum tax rate of 15%.

In an interlocking system hailed revolutionary, if one country fails to tax a multinational at this rate, other countries can charge a so-called "top-up tax".

This does not mean EU countries will necessarily adjust their corporate tax rate to the 15% baseline, since other countries will be able to step in to collect the taxes due from multinationals that pay their levies in low-tax jurisdictions.

This means that in a hypothetical scenario, a French multinational operating in Senegal and shifting its profits to Ireland could see either France or even Senegal charge a top-up tax if it doesn’t pay the minimum rate of 15% in Ireland.

“The concept is revolutionary,” according to Quentin Parrinello, a senior policy adviser at the EU Tax Observatory.

“It's the first time we have more than 140 countries, including all major economic actors, agree that multinational companies should pay a minimum amount of tax on the profits it reports.”

“There is, in theory, no incentive for a country not to apply the minimum tax because if they don’t, another country will get the tax revenues,” Parrinello added.

Most EU countries have already transposed the EU Directive - that makes the new rules a reality - into law. Five countries - Estonia, Latvia, Lithuania, Malta and Slovakia - have informed the European Commission that they will delay implementation as they have fewer than twelve affected multinationals operating within their borders.

Too many loopholes

But despite its promise, experts fear the reform alone cannot stamp out tax havens or prevent a so-called ‘race to the bottom’ of harmful tax competition between governments.

States can still abide by the new minimum rate whilst offering generous tax credits and other deductions that effectively reduce the tax rate below 15%. Many states are already introducing attractive transferable credits, grants and subsidies to compete for investment.

“We already see this, for example with the IRA (Inflation Reduction Act) in the US. We also have countries such as Ireland, Switzerland, and the Caymans already thinking of their own systems,” Parrinello explained.

Another loophole in the deal allows firms to exclude certain amounts of profits - equal to 8% of the value of tangible assets and 10% of payroll in the first year - from the tax base.

The EU Tax Observatory estimates that this loophole could cost the EU some €26 billion in its first year of implementation. A loophole-free 15% minimum tax could have raised around $95 billion (€87 billion) in the bloc in 2023, the watchdog says, dropping to just $67 billion (€61 billion) with the current design.

“There will not be an end to harmful tax competition and the race to the bottom on taxation,” Chiara Putaturo, Inequality and Tax Policy Advisor at Oxfam’s EU office, said.

“We are seeing a lot of countries like Ireland, Switzerland and also Bermuda changing some of the tax systems they had before to introduce generous refundable tax credit so that they will still be able to have a lower and lower tax rate,” she added.

“The minimum tax is a floor,” Parinello said. “It's much better to have a floor than nothing. But if you drill holes in the floor, you weaken the overall structure.”

World should move in lockstep

The OECD-designed system is unique in the way it incentivises all world nations to move in lockstep. Countries infamous for attracting giant companies with attractive tax incentives - such as Barbados and Panama - are also signatories.

An overwhelming majority of Swiss voters (78.5%) also backed the new rules in a consultation last June, putting pressure on their government to swiftly adopt the rules.

The US and China have not yet passed the necessary legislation but are likely to be incentivised to do so to ensure other countries do not top up their own tax collections at their expense.

But Putaturo warned that the 15% rate, which is lower than the global average, lacks ambition.

"The majority of countries, globally, have an effective tax rate which is higher than 15%. So this could even bring some countries to lower their tax rate, in a race to the minimum rather than a race to the bottom," Putaturo explained.

"The minimum tax also does almost anything in terms of the redistribution of tax revenues. The so-called resident countries, where multinationals are headquartered, will have the right to top up the tax to 15% if the tax haven does not collect the tax due. This is a problem for poorer countries because the resident countries are mainly rich countries," she added.

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