March 4. 2024. 6:08

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The key to winning back people’s trust: Tax multinationals

The ongoing inflationary crisis is marred by the ever-growing gap between people’s falling purchasing power and EU multinationals’ posting record-high profits. An offensive stance against tax evasion can help assuage growing political frustration.

If there is one thing that is unbearable when the economy’s down, it’s seeing that some actually benefit from it.

The sense of inequity that arises from seeing a small minority of people gain a lot while the large majority is evidently worse off doesn’t just amount to economic aberration – it’s politically explosive.

The 2022 inflationary crisis brought this tension to its peak. On the one hand, supply-driven price rises and an absence of meaningful wage increases means EU citizens have seen their purchasing power dwindle in the past year.

On the other hand, EU multinationals, especially energy providers, have seen their profits go through the roof. The big five – TotalEnergies, ExxonMobil, Chevron, BP, and Shell – combined record-high profits of $153 billion (€141 billion) in 2022.

There have been numerous calls to tax windfall profits and some EU countries, as well as the European Commission, reluctantly put together a framework, wary as they might be that this would scare business away.

Meanwhile, the latest Eurobarometer figures show EU citizens’ trust in their governments and national political institutions plunging again, while people are growing more defiant.

In it together

Political leaders must act before they lose all credibility and calls for political upheavals start rising. If in doubt, just look to France.

A big overhaul is needed, and an offensive stance against tax evasion might just be the one thing EU political leaders need to win back some of their credentials and prove to voters they can make multinationals contribute to European efforts to keep inflation under control.

It is estimated that governments across the globe lose an average of €450 billion a year through tax evasion. While the term is loose – you know that when even the OECD acknowledges it is “difficult to define” – one thing’s for certain: €450 billion is a lot, and we’re better off with it than without.

A good first step, which could serve to fill governments’ coffers all the while weaving into a political narrative that ‘all must pay their fair share’, would be to speed up implementation of the OECD’s minimum taxation on multinationals.

The EU Tax Observatory estimates that a minimum 15% corporate tax rate, applied to any company with an annual turnover of €750 million or more – a deal approved by 136 countries in 2021 – could raise up to €48 billion annually.

It is no magic solution to today’s troubles, sure, and it’s a mere 10% of the total lost to tax evasion. It is also nowhere near the estimated €170 billion that the 25% minimum rate, which had initially been aired when OECD negotiations first started, would have secured.

But the solemn, political decision to go ahead with the new international tax regime would help to create a sense that each economic player must play a part, to the extent that they can.

Another tool at EU governments’ disposal would be to make actual use of General Anti-Avoidance Rules (GAARs), designed to strike down otherwise-legal international practices that companies engage in for the sole purpose of dodging tax.

The tool is rarely used for fear of costly litigations, though it sits at the heart of the original 2016 Anti-Tax Avoidance Directive (ATAD), and was transposed by all member states in 2018.

“If there’s political willingness to use and impose GAARs, our approach towards profit shifting [to more tax-friendly jurisdictions] would be very different,” Gabriel Zucman, EU Tax Observatory director and renowned tax evasion expert, told a French Parliamentary hearing on Wednesday (22 March).

In short: it’s there, so you might as well use it.

‘Rather modest’ is better than nothing

Let’s be clear – the OECD proposal is not perfect. Carve-outs to the minimum tax rate are such that international tax competition is far from over, and multinationals will face incentives to shift real economic activity to tax-friendly countries.

The other pillar of the OECD agreement, which looks to allocate parts of multinationals’ profits back to the country where revenue is generated, instead of the one where headquarters is located, would also generate no more than €10-20 billion globally every year.

A “rather modest” sum, Zucman told MPs.

The same goes for GAARs: They’re hard to implement and can open the doors to lengthy litigations, which would reflect badly on governments and send an anti-entrepreneurial message.

Still though, a little is better than nothing at all, if governments can show they have the power and want to make multinationals pay their fair share.

“It’s about political courage”, Zucman said. Let’s see if politicians will find it.

The graph shows the amount of tax revenue EU countries could receive under an international minimum corporate tax framework. It is rooted in the notion of tax deficit, “defined as the difference between what multinationals currently pay in taxes, and what they would pay if they were subject to a minimum tax rate in each country”, according to the EU Tax Observatory.

The 15% tax rate is the effective tax rate OECD countries agreed upon in 2021.

This graph does not take into account potential carve-outs, where a reduction in the tax base will apply as determined by employee compensation and tangible assets. These carve-outs exist in the final OECD deal, however, further reducing the amount of tax revenues that go back into EU countries’ coffers.

EU lawmakers push for victim-centred approach in forced labour products ban. On Tuesday (21 March), members of the European Parliament’s development committee discussed their position on the proposed law to ban the import to the EU of products made with forced labour. The committee’s rapporteur Ilan De Basso (S&D) said the proposal is an important step forward, but added that victims should be at the centre of the ban, with remediation for affected workers. The committee will continue to draft its opinion, with a vote expected at the end of June.

EU Commission presents Net-Zero Industry Act. To ensure more production capacity of renewable energy technologies in the EU and as a reaction to the US, the Commission set a goal of 40% of the EU’s net-zero technology to be produced in the Union when it presented its Net-Zero Industry Act last Thursday (16 March). To achieve this goal, the Commission wants to make it easier for net-zero projects to get the necessary permits to get going. Contrary to an earlier draft, there are no “Buy European” clauses in the Commission proposal, only some weakly worded “Buy less Chinese” clauses.

Commission wants to ensure availability of critical raw materials in Europe. Also last Thursday (16 March), the Commission presented its Critical Raw Materials Act. With this proposal, the Commission wants to make it easier for raw materials extraction and refining to happen in Europe. It also wants more visibility and control over the raw materials supply chains of EU companies. While most of the measures in the proposals are aspirational rather than binding, the Commission also included a potentially pivotal article on joint procurement. The article could put the Commission in charge of organising the procurement of raw materials for EU companies to create some market power vis-à-vis dominant actors like China.

EU institutions stress stability of EU banks in light of Credit Suisse collapse. Under high international pressure, the Swiss government forced UBS to buy the other big Swiss bank, Credit Suisse, which had finally lost the trust of its customers and investors after a series of scandals over the past years. Meanwhile, the European Central Bank (ECB) stressed that European banks were solid. The ECB and the Single Resolution Board criticised the Swiss response for bailing out Credit Suisse shareholders over bondholders, saying that this would not happen if a similar case arose in the eurozone. On Friday (24 March), EU leaders meeting in Brussels are expected to discuss the consequences of the banking crisis for the EU.

EU Commission launches capacity-building for Ukraine reconstruction. The European Commission launched a capacity-building programme for Ukrainian cities to receive technical support for rebuilding efforts. During a press conference at the Cities Forum in Turin on 16 March, the Commissioner for Cohesion and Reforms Elisa Ferreira said the initiative does not include financial support, but “it’s important symbolically.” On the same day, the Commission also launched a European Urban Initiative to improve the quality of investments in EU cities.

Progress on negotiations over EU funds dispute with Hungary, said Commissioner Ferreira. Negotiations are ongoing with Viktor Orbán’s government for the unblocking of EU funds frozen due to rule of law breaches, Commissioner Ferreira told reporters at the Cities Forum on 16 March. “We made a lot of progress with the Hungarian government, nevertheless, there is a lot that needs to be overcome,” she said. While the operational programmes under cohesion policy can start being implemented, the reimbursement of funds will depend on the fulfilment of the conditions set by the Commission, Ferreira said, adding that she hopes “very soon everything will be normal in relation to funding.”

German liberals push for petrol price hike instead of combustion ban. Germany’s free-market FDP party, currently blocking the EU-wide phase-out of internal combustion engines for cars, has proposed tackling road transport carbon by increasing the price of petrol and diesel through national carbon pricing and giving the money back to citizens via a per-capita direct payment. Read more.

Albanian government bids to stop young doctors, nurses emigrating. The government is preparing a scheme to prevent the emigration of young people, particularly doctors and nurses, through the means of home credit, wage increases, and requirements to practice locally for a set time. Read more.

Red Bull’s wings clipped as Commission raids premises. The European Commission raided the Austrian-based energy drink producer Red Bull on suspicion of illegal collusion and violation of EU antitrust rules. Read more.

Danish banks must prepare for more turbulence, warns Danish Risk Council. Danish banks are well equipped to withstand the current turmoil in the banking world but must prepare for possible turbulence when raising funds in the coming period, the Danish Systemic Risk Council warned on Tuesday. Read more.

Romania wants to push for euro adoption by 2026. Romania’s government is looking to adopt the euro by 2026, far earlier than the current plan to join the euro area by 2029, announced Finance Minister Adrian Câciu, adding that for this to happen, the National Recovery and Resilience Plan (NRRP) must be fully implemented. Read more.

EU-Šefčovič wants deal with Switzerland by summer 2024. During a visit to Switzerland on Thursday, the EU Commission’s Vice-President Maroš Šefčovič said he wanted to agree on the institutional questions that have haunted relations between Switzerland and the EU for years by the summer of 2024. Read more.

Credit Suisse: Life an death in liberal Switzerland. EURACTIV’s economy editor János Allenbach-Ammann examines what the life and death of Credit Suisse reveal about how economic and political power work in Switzerland.

How the Swiss ‘trinity’ forced UBS to save Credit Suisse. This tell-all story by the Financial Times is a must-read for everybody who wants to know how the events unfolded last week and over the weekend. You can find it translated into multiple languages here.

Debt sustainability analysis as an anchor in EU fiscal rules. An assessment of the European Commission’s reform orientations. Economist Philipp Heimberger takes a closer look at the debt sustainability analysis that the EU Commission would like to use in its evaluation of member states’ fiscal plans under the new economic governance framework.