Brussels – A significant step toward the goal of tax fairness: with the new year, the EU directive imposing a minimum effective tax rate of 15 percent for multinationals operating on EU soil has come into force. After lengthy negotiations, the 27 Members voted unanimously — as expected for tax issues — in favor in December 2022.
Globally, 139 countries, representing over 90 percent of the world’s GDP, including the United States, China, India, and Russia, approved the international fiscal reform that the Organization for Economic Cooperation and Development (OECD) drafted. Minimum taxation for large companies is the implementation of the “second pillar” of the OECD reform, while the first focuses on reallocating taxable profits. The goal is to end the so-called “race to the bottom” or tax dumping: – the progressive lowering of income tax rates to attract investment by multinationals in national economies. With the EU 27, the first to implement the reform were the United Kingdom, Norway, Australia, South Korea, Japan, and Canada. Many are still missing.
All big corporations – not including government entities, NGOs, and pension and investment funds – with financial revenues of more than 750 million euros a year will have to set their hearts at rest. Countries like Hungary, Bulgaria, Ireland, and Cyprus, which have corporate taxes between 9 and 12 percent, will have to comply with the directive and increase the levy on multinationals that have built homes where they saw tax advantages. The prime examples are the big tech companies based in Ireland -Google, Apple, Meta, Microsoft, and Amazon, to name a few.
Specifically, the directive provides a common set of rules to calculate and apply a “top-up tax” in a particular country if the effective tax rate is less than 15 percent. Should a subsidiary company is not subject to the minimum effective rate in a
foreign country where it is located, the Member State of the parent
company will also apply a top-up tax on the latter. In addition, the directive ensures effective taxation in situations where the parent company is located outside the EU, in a low-tax country that does not apply equivalent rules.
“A new dawn for the taxation of large multinationals,” said EU Commissioner for Economic Affairs, Paolo Gentiloni. An “important step toward a fairer corporate taxation system.” According to OECD estimates, the global tax reform could generate $220 billion worldwide. Provided all signatories keep their word and put the agreement into practice.
English version by the Translation Service of Withub
