The European Union began the process of making a minimum 15 per cent corporation tax legally binding across the bloc on Wednesday, with proposals to transpose the OECD deal into EU law.
"We are not abolishing tax competition. we are not introducing a harmonisation of corporate taxation in the EU, we will still have a very different level of corporate taxation in different countries. What we are introducing is a ceiling, a limit, on the race to the bottom," said EU economy commissioner Paolo Gentiloni as he unveiled the plan.
"We know that many countries have a much higher, including Italy, level of corporate taxation and the differences will still be there. But we can't accept the idea that this competition is a real race to the bottom."
The legislative proposal by the European Commission is based on a deal hammered out by 137 countries in the OECD and backed by the world's largest economies in the G20 earlier this year.
The minimum corporate tax law would apply to any company situated within the EU with combined revenues of €750 million a year or more, whether domestic or international, dashing the hopes of the Irish Government that large local businesses would be exempt.
“The 15 per cent applies, following the OECD model, also to the domestic subsidiaries and large-scale purely domestic groups. This is also to ensure compliance with our fundamental freedoms, in order to avoid any risk of discrimination between cross-border and domestic situations and therefore violating EU treaties,” said Mr Gentiloni.
The level of 15 per cent refers to the “effective” tax rate, and the rules would allow for countries to hit companies with a “top-up tax” on their profits where their actual rate of tax paid is deemed to be below the minimum.
The rules will allow for a phase-in period that provides for some “carve-outs” from the rate. When it first comes into force, companies would be able to exclude an amount of income equivalent to 10 per cent of payroll and 8 per cent of tangible assets from tax calculations. The permitted level will gradually decline over 10 years until it bottoms out at 5 per cent of payroll and 5 per cent of tangible assets.
This compromise had been essential to get China to back the deal, Mr Gentiloni said.
It is part of a package of measures to clamp down on aggressive tax planning, including a crackdown on the use of shell companies for tax purposes by individuals as well as businesses.
The new rules would use reporting requirements and measures including income, staff numbers, and premises, to “help national tax authorities detect entities that exist merely on paper” and establish transparency standards “so that their abuse can more easily be detected by tax authorities”, the European Commission said.
Any member state would be able to request an audit of a shell company located in another member state under the rules. If a company’s income is deemed to be passive, a majority of its transactions cross-border, and its management and administration outsourced, it will be subject to special tax reporting obligations and its access to tax relief and benefits restricted.
Further proposals are due to be laid out in 2022, including a plan to implement the other part of the OECD and G20 agreement on the reallocation of taxing rights. The commission will also propose rules to force multinationals to publish their effective tax rates, and a directive to increase tax oversight of cryptoassets, with the aim of an overall modernisation of taxation for the digital era.
Gentiloni said the commission would propose a second law in the middle of 2022 to implement the other part of the OECD and G20 agreement on the reallocation of taxing rights.
Support from the United States administration of Joe Biden had been crucial to securing the OECD and G20 agreement on the taxation reform. The Democrats' struggles in getting part of his economic programme passed through the Senate has raised concerns that the tax rule could also run into difficult opposition.
Within the EU, the legislation is also far from final. It must still be approved by the European Parliament and by member states, and there are indications that some capitals could have lingering doubts about the plan.
The Republic initially hesitated to sign up to the agreement, alongside Estonia and Hungary, which has a 9 per cent corporation tax rate and is locked in a dispute with the commission over separate issues. Mr Gentiloni downplayed reports that Tallinn and Budapest were once more raising objections to the plan.
"All European member states joined after an initial difficulty. You may remember we had three member states not joining the agreement . . . Estonia, Hungary and Ireland. I have to say that [in] the successive weeks and months they were able to join and I really appreciate the effort they made," he told journalists.
“It would be quite difficult to go back from this decision that they have taken only a couple of months ago.”