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EU hails G7 tax agreement but internal divisions could thwart consensus

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The G7 wants to hold Big Tech accountable to tax authorities.
The G7 wants to hold Big Tech accountable to tax authorities.   -   Copyright  Francois Mori/Copyright 2019 The Associated Press. All rights reserved
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The European Union is ready to take a quantum leap in tax policy – and it doesn't plan to do it alone.

Last weekend the finance ministers and central bank governors of the G7 (Canada, France, Germany, Italy, Japan, the United Kingdom and the United States) reached a landmark deal to set a global minimum tax rate of 15 per cent for corporations.

The agreement also lays out a reallocation of taxing rights to ensure that taxing profits is no longer exclusively determined by a company's physical presence, a status quo that has been rendered obsolete by the growing dominance of cross-border tech multinationals, such as Google and Amazon.

The G7 communiqué envisions taxing rights based on the place where companies sell their products and services, a method that will better reflect the reality of digitalisation and globalisation.

With the deal, the G7 wants to put an end to what US Secretary of Treasury Janet Yellen called the "race to the bottom": over the past decades, developed economies have been competing against each other to offer the most attractive corporate tax with the goal of luring new companies and investors.

This mutual undercutting has seen corporate tax rates dramatically plummet. A 2018 study carried out by the Organisation for Economic Co-operation and Development (OECD) across 88 jurisdictions revealed an average corporate tax of 21.4 per cent, down from 45-50 per cent in the 1980s.

'A very big deal'

Proponents of a low corporate tax argue that it helps companies grow, motivates investors, curbs offshoring and rewards workers with higher salaries.

Detractors, on the other hand, believe modest rates deprive states of an important source of revenue to finance public services.

The G7 is aware a simple agreement won't fully solve the tense economic debate: the administration of US President Joe Biden initially championed a 21 per cent minimum rate, a figure that made international headlines but was soon thrown into doubt over its feasibility – and desirability.

The White House hopes the 15 per cent margin will serve as the bare minimum and rich nations, currently heavily indebted and desperate for ways to fund the post-coronavirus recovery, will go even further. The precise technical details of the G7 deal still need to be negotiated and it might take several years before it comes into force.

Similar discussions are expected to take place over the next months in the G20 and the OECD, where the number of countries involved will be wider and the chance for success, slimmer.

"Since 2015 there has been a real focus on avoiding profit-shifting and helping to make sure that countries are paying taxes in the same places where they are earning their profits," Rebecca Christie, a non-visiting fellow at Bruegel, tells Euronews.

"15 per cent at the global level would be a very big deal because right now there is no global deal. Individual countries would be free to set higher tax rates if that was in line with their priorities and if that was something that they could pass domestically. Globally, it's very hard to get people to agree on anything. So agreeing on 15 per cent would be good."

The turning point

For the European Union, the G7 breakthrough is a major victory.

EU countries have some of the largest and most generous welfare systems in the world, covering areas like social protection, healthcare, education, environment, housing and culture. Public expenditure in the bloc represents over 47 per cent of the total GDP. These services are extremely expensive and require a strong and stable tax mix to fund them.

As the COVID-19 ravaged the purchasing power of ordinary citizens and destroyed millions of jobs, and therefore diminished revenue from taxing personal income and the purchase of goods, European governments turned their attention to companies, particularly the biggest ones, many of which actually flourished during the health crisis thanks to the abrupt shift to the online world.

A report by the newly-inaugurated EU Tax Observatory, a research centre to assist in the fight against tax abuse, estimates that the agreed minimum corporate rate of 15 per cent will allow the bloc to collect an extra €50 billion in 2021. Had the G7 settled for a 21 per cent rate, the EU could earn up to €170 billion.

"This [G7] agreement is a big step towards fairness and a level playing field," said European Commission President Ursula von der Leyen.

Olaf Scholz, Germany's finance minister, called it a "tax revolution" while his French counterpart, Bruno Le Maire, said it was "historic". EU Commissioner Paolo Gentiloni, who took part in the G7 summit on behalf of the European Commission, also celebrated the news, describing it as a "big step".

Optimism had been on the rise in Brussels and across the continent since Janet Yellen publicly declared America's support for a global minimum tax rate in early April. Yellen's words were far from altruistic: President Biden is in need of funds to finance his ambitious $2.3 trillion infrastructure bill.

In an obvious sign of coordination, the Commission unveiled a strategy to make taxation systems fit for the 21st century two weeks before the G7 meeting in London. As part of the plan, the executive has promised to put forward a common tax base and single rulebook for businesses.

"The Commission is very on board [with tax reform]", says Christie. "[It] will do everything it can to make sure that the EU implements the [G7] agreement and that it complies with all the treaties and EU laws. There will need to be EU legislation."

Contentious patchwork

Brussels hopes the momentum injected by the G7 will help pave the way for EU-wide unanimity, an inescapable requirement established by the EU treaties for taxation matters.

But the road towards unity might be a hard and bumpy journey.

Four EU countries (Hungary, Bulgaria, Cyrus and Ireland) currently have corporate rates that fall below the 15 per cent mark. One of them, Hungary, even falls below the 10 per cent threshold. On the other end, Germany, Portugal, France and Malta surpass the 30 per cent barrier, which means their corporate tax rates are twice – or even thrice – as high as those of their peers.

Increasing their tax rates overnight to meet the G7 standard could upend a deep-rooted economic environment and dispossess them of a very characteristic trait on the world stage.

"Nobody has the right to intervene from abroad in Hungary’s tax policies," said Péter Szijjártó, Hungary's foreign affairs minister, last month as the debate gained traction.

The case of Ireland has attracted a great deal of attention in recent years.

It has promoted its 12.5 per cent corporate tax rate to persuade multinationals to establish their European headquarters inside the country.

Google, Facebook, Twitter, LinkedIn and Airbnb have all set up shop in Dublin around an area known as Silicon Docks, a nickname that mimics California's Silicon Valley.

This system has seen Big Tech companies submit their earnings under a generous scheme that critics argue prevents other countries from taxing profits made inside their borders.

The European Commission has tried to rein in the practice it considers unfair: in 2016, Margrethe Vestager, EU commissioner for competition, ordered Apple to pay €13.1 billion, plus interest, in unpaid taxes to the Irish state. Vestager argued Ireland's tax benefits were tantamount to illegal state aid.

The EU's General Court later ruled in favour of Apple and criticised the European Commission's weak reasoning. The Irish government welcomed the verdict, but Brussels said it intends to appeal and continue the fight.

While the battle unravelled in the Luxembourg tribunal, some European countries, like France, the UK, Italy, Spain and Austria, took matters into their own hands and decided to introduce special taxes for digital services as interim solutions until a global deal is reached.

These arrangements have not been coordinated and differ in nature, but mostly target selected revenues of large digital companies. The White House finds them discriminatory because they primarily affect American corporations and has threatened to slap tariffs as retaliation.

Worried about fragmentation, the European Commission is working on its own proposal for an EU-wide digital tax, with the aim of making it operational by 2023. The executive has said the levy will be modest and non-discriminatory and will work in parallel to the OECD agreement.

'Not necessarily suitable'

The dispute around Apple and digital taxes serve as a preview of the upcoming discussions at the EU level. Small- and medium-sized countries claim they need to offer attractive tax rates in order to compete against bigger economies.

"I look forward now to engaging in the discussions at OECD. There are 139 countries at the table, and any agreement will have to meet the needs of small and large countries, developed and developing," said Paschal Donohoe, the Irish finance minister, on Twitter shortly after the G7 reached the agreement. Donohoe attended the summit in his capacity as president of the Eurogroup.

Billy Kelleher, an Irish MEP who sits with the liberal group Renew Europe, shares the minister's point of view and believes the eventual OECD deal should be "suitable" for all kinds of countries.

"We do need to accept that what is being proposed by the G7 may not necessarily be suitable to the broader makeup of economies across the globe. So I think we have a way to go on this," Kelleher told Euronews.

"Trying to put one tax that suits the larger economies across the entire globe may not be sufficient to address the differences in economic output, economic activity within countries. So I just think we have to be conscious of that as well."

Kelleher thinks a digital tax is needed but warns against unjust and unilateral measures.

"We have companies that are amassing massive profits. We also have to ensure that we tax him in a fair and equitable way to ensure that all countries can benefit from the revenue that they are generating. I just think that we have to ensure that from that perspective, when we talk about digital taxation, for example, that we have is consistency across the globe.

NGOs have also been critical of the G7, although for different reasons. Oxfam International blasted the G7 for not going further than 15 per cent, saying the agreed threshold will "do little" to end the race to the bottom and the use of tax havens.

"It’s absurd for the G7 to claim it is ‘overhauling’ a broken global tax system by setting up a global minimum corporate tax rate that is similar to the soft rates charged by tax havens like Ireland, Switzerland and Singapore. They are setting the bar so low that companies can just step over it," said Gabriela Bucher, Executive Director of Oxfam International.

"Stopping the explosion in inequality caused by Covid-19 and tackling the climate crisis will be impossible if corporations continue to pay virtually no tax."