On July 10, in Venice, a meeting of G20 finance ministers and central bank governors issued a communiqué saying that a historic agreement had been reached on a global tax framework. Pictured is Italian Finance Minister Franco (left) at a news conference, | Visual China
At the G20 Finance Ministers and Central Bank Governors' Meeting in July, member states reached a historic agreement on a global tax reform framework that will be presented to the G20 Summit at the end of this month for discussions to reach a global agreement.
To this end, in late September, US Treasury Secretary Yellen spoke with Italian Economy and Finance Minister Franco, British Finance Minister Sunak and French Finance Minister Le Maire, stressing the importance of promoting global tax reform between OECD and G20 countries, and persuading these European countries to withdraw digital taxes to reach a compromise.
Will the digital tax divide that has plagued the United States and Europe for three years be resolved?
Global corporate tax reform under the US-EU game
As early as 2013, the Organisation for Economic Co-operation and Development (OECD) launched global tax reform negotiations, arguing that early tax arrangements could no longer address the way multinational tech giants operate.
The EU is actively promoting global tax reform. On the one hand, EU member states that have experienced a sovereign debt crisis have strict disciplinary pressures on fiscal expenditure and government debt, and increasing taxes is an important task for the government. However, the unprecedented resistance to tax increases in traditional industries, such as the yellow vest movement in France in 2018, was caused by fuel tax increases, so the development of new tax sources is urgent for EU countries. On the other hand, the tax avoidance behavior of US technology giants has long been criticized in Europe, which not only directly causes the loss of EU taxes, but also puts local enterprises in the EU at a disadvantage in competition. Therefore, under the slow tax negotiations of OECD, the EU actively introduced the digital service tax bill in 2018, although it was not implemented as a whole due to the opposition of individual member states, but France, Italy, the United Kingdom and other member states have successively introduced their own digital service taxes.
Unlike the European Union, the United States has reacted passively to international tax reforms and has explicitly opposed digital services taxes. The reason is that tax reform and digital tax are basically aimed at the leading technology companies in the United States. The previous Trump administration not only threatened countries that had already imposed a digital services tax with tariffs, but also unilaterally withdrew from OECD global digital tax negotiations in mid-2020, leading to a temporary shelving of international tax negotiations. The Biden administration has taken a roundabout approach, continuing to threaten tariffs against countries that unilaterally impose digital taxes, while turning to supporting the world's lowest corporate tax rate in the OECD's tax reform blueprint.
It can be seen that the progress of global tax reform is directly related to the change in attitude of the United States. The reason for the change in attitude in the United States lies on the subjective intention of resolving the digital tax difference between the United States and Europe on the one hand, and the fiscal difficulties caused by the impact of the new crown epidemic in the country on the other hand. These two dynamics coincide with those of the European Union, and as a result, global tax reform has recently made progress.
The US and EU are deeply divided on digital taxes. On the poster for the 2019 European Parliament elections, the EU flag "pasted" Trump's face, which also read, "This time, I register, I vote," meant to show Europe's dissatisfaction with the United States. | Visual China
The EU is on the sidelines of the digital tax collection scheme
The intention of the United States to replace digital taxes with global corporate tax reform is very clear. In July, after the G20 finance ministers' meeting announced a consensus on global tax reform, Yellen personally went to Brussels and persuaded the EUROPEAN Union to suspend plans to push ahead with a digital services tax.
However, the EU remains on the sidelines on global corporate tax reform and digital taxes. First, although the EU proposed to suspend the digital tax collection plan, it also proposed to suspend the assessment until the autumn. Under the scheme, the EU will impose a 0.3% digital tax on goods and services sold online within the EU by businesses with a turnover of more than €50 million. This revenue is significant for bonds issued by the European Union as a result of the COVID-19 pandemic. However, in the global tax reform framework reached by the OECD, the turnover threshold of enterprises taxed by market countries is as high as 20 billion euros, and market countries can only tax 20%-30% of the remaining profits of more than 10% of their profits, so that there are only a few companies in the EU that can really get taxes. It can be seen that the EU's proposed suspension of digital tax collection plan is still far from the abolition of digital taxes expected by the United States, and the specific direction depends on whether countries can reach specific agreements at the end of this month.
Second, EU member states will not easily abandon digital tax collection. The EU and its member states are already a two-tier governance structure with strong independence from each other. The EU's announcement of a moratorium on digital tax collection plans will not necessarily affect the practices of member states that have already introduced digital taxes. At present, Austria, France, Hungary, Italy, Poland, Spain and other 7 EU member states have introduced digital taxes, Belgium, the Czech Republic, Slovakia has formed a proposal to impose a digital tax, Latvia and other countries have expressed their intention to collect digital taxes.
Third, there is no agreement within the EU on global corporate tax reform. Currently, three EU member states, Ireland, Hungary and Estonia, have refused to join the global agreement on the lowest corporate tax rate. The global corporate tax agreement involves the adjustment of the corporate tax rate of each country, which belongs to the shared power of the EU and member states, and requires the approval of the member states. The opposition from these three member states would result in the EU being neither able to reach a valid agreement nor obtaining changes to subsequent laws. Therefore, the EU will not rush to cancel the digital tax plan until it has obtained internal agreement.
The effect of the global tax reform on tax increases is questionable
The key point in the U.S.-EU agreement on corporate tax reform and the agreement to suspend digital taxes is that the two sides plan to increase taxes on large multinationals through global corporate tax reforms. However, as far as the two-pillar framework currently reached is concerned, even if countries eventually sign an agreement, in practice, the US and Eu tax increase plans for large multinational companies may not be able to achieve what they want.
First, there are limited taxpayers and tax obligations may be circumvented. Under the agreement reached by the OECD at the beginning of July this year, under the first pillar, companies with taxation rights in market countries are required not only to have annual revenue of more than 20 billion euros, but also to have a profit margin of more than 10%. In the "Fortune Global 500 2021 Ranking" released in August, the lowest operating income was 24 billion US dollars, equivalent to 20.3 billion euros. Not many of these companies have profit margins of more than 10%, the top five companies in terms of sales have profit margins of less than 10%, only 13 of the top 50 companies have profit margins of more than 10%, and the agreement also excludes extractive industries and regulated financial businesses, leaving only 7 companies excluding this type of enterprises to be included in the scope of taxation. Such companies also need to meet the premise of achieving at least 1 million euros of operating income in the market country. In addition, large multinational enterprises have rich experience in tax avoidance and may use account segmentation and profit hiding to avoid tax obligations.
Secondly, the willingness of taxpayers is different, and international supervision and coordination are difficult. The second pillar of the OECD agreement is a commitment by countries to set a minimum global corporate tax rate of at least 15 percent to combat tax avoidance. The enforcement effect of this article is equally questionable. The international tax reform agreement is not mandatory, and the current tax rates in Ireland and Hungary, which currently refuse to join the world's lowest corporate tax rate agreement, are both below 15%. As early as 2014, when the European Commission investigated Apple's tax problems in Ireland, it found that apple's tax agreement with the Irish government since 1991 made Apple pay only 1% of the actual tax in 2003, and the proportion of tax paid in 2014 was as low as 0.05%. In 2016, the European Commission ruled that Apple pay a $13 billion in retroactive tax to the Irish government, and both Apple and the Irish government subsequently appealed to the Court of Justice of the European Union. In July 2020, the General Court of Justice of the European Union ruled in favor of Apple, and the European Commission later appealed to the Eu Supreme Court, and the final verdict may still be waiting for several years. As a result, the difficulty of regulating cross-border tax avoidance can be seen.
It can be seen that the divergent attitudes of Europe and the United States towards digital taxes determine that the differences between the two sides are difficult to resolve in the short term. Once the new tax revenue under the new tax system is significantly lower than the digital tax revenue, the possibility of another digital tax imposed by EU member states remains.
Author: Jiang Yunfei (Assistant Researcher, Institute of World Economics, Shanghai Academy of Social Sciences)
Editor: Liu Chang