The first section of the proposals, Pillar One, establishes the principle that profits shall be taxed where economic activities take place and value is created. However, application of the principle will be limited. It will apply only to multinational enterprises (MNEs) with a global turnover of over €20 billion and profitability above 10%. This high threshold means that only around 100 of the world’s largest multinationals will be captured by the change. In these cases, between 20-30% of “residual profit” – profit in excess of 10% of revenue – will be allocated to countries where the companies do business.
There is one final point, the issue of incentives in national taxation systems that drive base erosion and profit shifting has been largely ignored. As mentioned previously in EURACTIV over the last 70 years, US lawmakers have constructed a taxation system with avoidance baked into it, often in direct response to the corporate lobbies that fund US politics. For decades US corporations have been incentivised to delay paying US taxes by holding profits offshore, contributing to the global problems that the BEPS project was aimed to cure. There is nothing in the agreement to prevent this process from continuing.
Dick Roche
This proposed tax reform has certainly grabbed a lot of headlines, but the fine print reveals just as many exceptions and carveouts: for extractive industries, regulated financial services, and shipping. In the wake of numerous investigations about tax evasion, from the Panama to the Pandora Papers, you would be hopelessly naïve to think that rich people and corporations wound not find loopholes around these new measures.
And the biggest offender in this regard is ironically the country that boasts about negotiating the deal: the United States. Between the autonomy of US states, allowing them to set up impregnable tax havens such as South Dakota, and the divisions in Congress, which may prevent the proposal from ever being ratified, I have little confidence that these new regulations will have a measurable impact.
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