Green coalition European Parliament lawmakers are urging French Finance Minister Bruno Le Maire to ambitiously implement global minimum tax provisions of a key global tax reform deal once France takes over the EU Council presidency.
In a letter sent to Le Maire November 4, Greens/European Free Alliance members of the European Parliament said that the two-pillar tax deal is historic because countries have agreed, for the first time, to set an effective minimum tax rate to fight corporate tax avoidance. However, the agreement falls short in many ways, according to the letter.
A total of 136 of the 140 jurisdictions in the OECD inclusive framework on base erosion and profit shifting reached a final political agreement October 8 on the plan, which is meant to address the tax challenges of the digital economy. The number of jurisdictions that have joined the agreement increased to 137 after the OECD announced November 4 that the inclusive framework’s newest member, Mauritania, has also signed up to the deal.
Pillar 2, which builds on a joint French-German proposal from 2018, would require large multinational enterprises to pay a minimum level of tax under global anti-base-erosion (GLOBE) rules, which comprise the income inclusion rule and the undertaxed payments rule.
The income inclusion rule would apply a top-up tax to an in-scope MNE's income that is taxed below an effective tax rate of 15 percent. The undertaxed payments rule, meanwhile, would deny deductions for payments taxed under the minimum rate. MNEs with annual consolidated group revenues equal to or exceeding €750 million would be in scope of the GLOBE rules.
The GLOBE rules also provide a phased-in substance-based carveout set at 8 percent of the carrying value of tangible assets and 10 percent of payroll. Those rates would decrease over 10 years to 5 percent for both assets and payroll.
Under pillar 1 of the agreement, countries commit to adopt new profit allocation and nexus rules so that 25 percent of the largest MNEs’ residual profits are redistributed to the countries in which consumers are located. The two pillars follow up on action 1 of the BEPS project, which aimed to address the tax challenges of the digital economy.
The MEPs raised concerns about what they viewed as weaknesses in the pillar 2 agreement, including the minimum effective tax rate, which they said was an excessively low floor and risks a downward trend for tax rates around the world. That was a regrettable mistake because President Biden had pushed for a 21 percent rate, which neither the French government nor the EU had supported, the lawmakers wrote.
Moreover, the threshold for multinationals to fall under the pillar 2 rules is too high, meaning that the effective minimum tax rate would apply to only a handful of MNEs, the letter says. The carveout under the GLOBE rules is also a missed opportunity to recover tax revenue, the MEPs wrote.
Once France takes over the EU Council presidency on January 1, 2022, Le Maire should urge his EU counterparts to be bolder when implementing the pillar 2 rules, at least on an intra-EU basis, the letter says.
Specifically, the MEPs urged Le Maire to propose an effective minimum tax rate of at least 21 percent within the EU; lower the GLOBE scoping threshold from €750 million in annual revenue to €20 million in annual revenue to capture more companies; and abolish the substance-based carveout. Lawmakers also urged Le Maire to publish the 2020 effective tax rates of MNEs headquartered in France to enhance tax transparency.
A French Finance Ministry spokeswoman told Tax Notes on November 5 that Le Maire is writing a response to the Greens/EFA letter.
This is not the first time MEPs have called for a more ambitious implementation of the global tax deal. Most recently, the European Parliament’s subcommittee on tax matters and members of the Slovenian Parliament’s Finance Committee urged the European Commission to drop the pillar 2 substance-based carveouts and to give EU member states more flexibility to increase the minimum rate. Slovenia holds the EU Council presidency.
The OECD secretariat is working to develop model rules and commentary and a model treaty provision related to pillar 2 by the end of November. The European Commission is expected to propose a directive for implementing pillar 2 rules on December 22.