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.
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