Headlines were made around the world recently owing to the fact that over 130 countries are committed to adopting a minimum corporate tax rate of 15%, regardless of the country in which the income was earned. This is an attempt to overcome the current situation in which many large companies are paying little to no tax after shifting their profits to jurisdictions with favourable tax rates, a practice known as forum shopping. For example, many companies sell goods online to Canadian customers but pay no corporate tax in the country. With more and more companies shifting to a digital sales model in many countries, this concern has risen during the current pandemic times, leading some countries to propose digital sales taxes on those profits.
Changes Initially Proposed by OCED in 2019
The recent changes and proposals have their roots in the sweeping change proposed by the Organization for Economic Cooperation and Development (OECD) in 2019, which introduced a unified framework aimed at reducing corporate tax avoidance and evasion. The proposals would see a minimum tax rate applied to all corporate income in every member jurisdiction. There would also be an increase in the rights of countries to levy tax on corporate income earned from sales in their jurisdictions, regardless of where those profits were recorded. This attempt initially failed to gain sufficient support at the time, but it did embolden individual member states of the OECD to start creating their own taxes on digital services and put a critical spotlight on the corporate tax practices of multinational corporations.
In the months following the OECD meeting, France introduced a 3% digital tax on all sales of big technology companies like Google and Amazon. The French government has since agreed to abolish this tax if all OECD countries enact a global minimum level of taxation for large multi-national companies. Canada has also proposed implementing a similar digital services tax, however, Minister of Finance Chrystia Freeland has pledged to abandon the plan if the global minimum tax rate is adopted.
Some Countries Claim the Proposal Violates EU Law
From a European standpoint, Estonia and Hungary contend that the agreement contravenes EU law, potentially causing a problem for the 23 member states which are parties to the agreement. Hungary and Estonia each have very favourable tax policies for large corporations. The two countries have raised objections to the proposed changes, which would likely affect their ability to use low tax rates to draw foreign business investment.
According to Rebecca Parry, a law professor at Nottingham Trent University, the basis for the objection likely stems from a 15-year old case called Cadbury Schweppes plc and Cadbury Schweppes Overseas Ltd v. Commissioners of the Inland Revenue. Cadbury Schweppes, a well-known candy and soft drink company with a vast global presence, operated out of the UK but had established subsidiaries in Ireland to take advantage of the country’s 12.5% corporate tax rate. The UK had attempted to collect tax on the Irish subsidiary’s profits, citing an exception to the rule under which the UK ordinarily wouldn’t tax the profits of a foreign entity. This is similar to the proposals under the OCED plan, which would enable countries to tax on profits earned by a large multinational corporation in that country, even if the business had no physical presence there.
Ultimately, the European Court of Justice held that it went against European Commission law for one member state to charge a company for profits made in another member state, thereby prohibiting the company from taking advantage of a more favourable tax regime in that other state.
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Despite the objections cited above, the OCED measures have overwhelming support, with 132 countries signing on to date. It remains to be seen how long it will take for these changes to be implemented, however, some are expected to come into effect as early as next year.
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