The European Commission’s proposal for a single corporate tax rulebook will cause EU countries to lose even more tax and lock in the flaws of the current tax system for at least a decade, the Tax Justice Network is warning.1 The problem is due to the proposal’s intention to halfway implement a long-called for tax reform designed to curb tax abuse by multinational corporations. The proposal will remove barriers on how multinational corporations can move their losses around within the EU, but stops short of giving governments the new powers needed to make sure corporations don’t leverage those losses for tax abuse.
“The BEFIT proposal has the potential to end the era of rampant corporate tax abuse, offering a lifejacket to our struggling public services. But taking the air out of a lifejacket turns it into a drowning hazard, and that’s exactly what the current proposal would do,” said Alison Schultz, research fellow at the Tax Justice Network.
New analysis by the Tax Justice Network, submitted to the European Commission’s public consultation on the Business in Europe: Framework for Income Taxation (BEFIT) proposal, finds to be unfounded concerns that a full implementation of the long-called for tax reform would be too disruptive.2
A full implementation, the Tax Justice Network reports, would raise $38 billion in tax revenue for 23 EU member states while Luxembourg, the Netherlands, Malta and Ireland would see a drop in tax revenue of 2 to 4 per cent. Luxembourg, the Netherlands and Ireland facilitate 24 per cent of the corporate tax losses countries around the world suffer yearly to cross-border tax abuse by multinational corporations.3 The Tax Justice Network expects the impact of a full implementation on the four EU members to be minimised further by the separate implementation of the EU’s Minimum Tax Directive, reducing their expected drop in tax revenue to 2 per cent and less – Luxembourg would actually see its tax revenue rise by more than 1 per cent.
In contrast, the halfway implementation proposed by the Commission is expected to reduce EU countries’ tax revenues by far more and lock in multinational corporations’ ability to abuse tax for at least a decade. The BEFIT proposal stipulates that the second part of the approach would be revisited for consideration no earlier than 2034 and only if the Commission “deems it appropriate”.
The Tax Justice Network is urgently calling on the European Commission to fix the proposal or abandon it. (quotes available further below)
Tax abuse antidote rejigged by BEFIT meant to replace 100-year-old rule
The tax reform at the heart of the European Commission’s BEFIT proposal is known as unitary taxation and has been longed called for by advocates of economic and tax reform. The EU previously explored the option of implementing unitary tax within the bloc in 2011 and 2016, to no success.
Unitary tax4 is designed to replace a 100-year-old tax approach – known as the arm’s length principle – which requires countries to treat a multinational corporation’s presence in different countries as the presence of completely separate businesses. Unitary tax more accurately requires a multinational corporation’s presence in different countries to be treated as the presence of one global business.
Multinational corporations are estimated to pay $311 billion less than they should in corporate tax a year, largely by abusing the 100-year-old arm’s length principle.5 Multinational corporations typically setup subsidiaries in corporate tax havens which they then use to charge themselves elsewhere in the world artificial or inflated costs. By paying themselves these costs, multinational corporations move their profits into tax havens. As a result, the parts of a multinational corporation that are outside of tax havens – the parts that sell goods and services – tend to report losses and the parts inside tax havens – that often only exist on paper – tend to report profits.
Since the 100-year-old rule requires the different parts to be treated as separate businesses, countries can only tax the part of a multinational corporation that fall within their borders, leaving the profit-capturing parts of a multinational corporation in tax havens out of reach.
Unitary tax would instead require a multinational corporation to be taxed as a whole, rather than on its individual parts. Each country would have a right to tax a portion of the multinational corporation’s total profit. That portion would be determined by a formula that reflects how much of the multinational corporation’s business activity – ie how much of its work force and its sales – takes place in the country. This is referred to as formulary apportionment.
This approach to taxing multinational corporations disrupts the core of the tax haven business model. A multinational corporation can still shift its profit into its shell company in a tax haven, but since the majority of its business activity occurs outside of the tax haven, the majority of its profit will be taxable by the countries where it does business. This removes the tax incentive for any multinational corporation to shift profit there.
Taking the tax out of unitary tax
The current BEFIT proposal intends to implement unitary tax without formulary apportionment, which is the defining feature of unitary tax. Shockingly, the Commission proposes to allow multinational corporation’s losses to be treated under a unitary tax approach but keep their profits treated under the arm’s length principle.
Multinational corporations would be permitted to consolidate their EU-wide losses under the BEFIT proposal, meaning the losses a multinational corporation makes across the EU could be deducted from the taxable profits its makes and reports locally in individual EU countries. In other words, an EU member state would be required to still treat the profit a multinational corporation reports locally as separate from the rest of the multinational corporation’s EU operation, but can treat the losses it incurs across the EU as part of its local operation. This will result in multinational corporations reporting far less profit since losses of a regional scale can be claimed against profits of a national scale.
Unitary tax with formulary apportionment would balance out this effect by allowing a multinational corporation’s profit to be treated at a reciprocal level. Without proper formulary apportionment, unitary tax in practice becomes a major, permanent tax cut for multinational corporations.
Even worse, the Tax Justice Network warns, by allowing multinational corporations to claim their EU-wide losses against their local profits, the BEFIT proposal turbo-boosts the primary method multinational corporations use to abuse tax. Multinational corporations can more flexibly and efficiently use manipulated and inflated losses from anywhere in the EU to make their profits look smaller, making all EU countries subject to the weakest link of anti-loss manipulation regulation in the bloc.
Alison Schultz, research fellow at the Tax Justice Network said:
“The goal of unitary tax is to tax multinationals corporations in the places where they do real business activity, instead of in tax havens where they cook the books. This bizzarro version of unitary tax used in BEFIT won’t change where or how we tax multinational corporations, but it will let them cook the books in even more extreme ways.”
“We urge the European Commission to get BEFIT back on the right track by putting formulary apportionment back into the proposal, or drop it altogether. The proposal as it currently stands will do more harm than doing nothing at all.”
Markus Meinzer, director of policy at the Tax Justice Network said:
“This proposal combines the worst of the old and new ways of doing tax and will even further reduce the tax bill of corporations, spurring even more inequality and hardship among everybody but the super-rich. That is exactly what you get when tax havens have veto powers on the decision-making process behind closed doors. The world’s worst corporate tax havens are EU members and they have not just robbed their neighbours of vital public money, they’ve made reasonable EU tax policy impossible.
“We’ve seen the same problem play out at the OECD and this is exactly why the vast majority of countries voted at the UN last years to move decision-making on global tax rules away from the OECD and to the UN.6 The oversized influence of tax havens and corporate lobbyists made it impossible for the OECD to curb global tax abuse, just like in the EU. The UN’s democratic, transparent and human-rights based processes are our best shot at taking power back over global tax rules. We urge EU countries to support this year’s negotiations at the UN on establishing framework convention on tax.”
The Tax Justice Network has provided a detailed list of recommendations to improve the BEFIT proposal in its submission to the European Commission’s public consultation.
Notes to editor
- More information on the European Commission’s Business in Europe: Framework for Income Taxation (BEFIT) proposal and the public consultation on the proposal is available here.
- The Tax Justice Network’s submission to the public consultation on BEFIT is available here.
- For more information on countries’ tax losses to tax havens, see the Tax Justice Network’s State of Tax Justice 2023.
- More information on unitary tax is available here.
- See note 3.
- More information on last year’s historic UN vote to begin negotiations on a framework convention on tax is available here.