Winners and losers: how the G7 tax pact affects European countries

G7 tax pact affects European countries

The G7 meeting has left many unknowns, including how the global tax reform agreed to by the leaders at the meeting that took place a few days ago in the United Kingdom can affect economies, especially the decision to create a minimum tax of at least 15% on large multinational companies to prevent them from using tax havens to evade taxes, so that countries can tax companies where they generate income. According to experts, if this measure is applied it will make Europe have clear winners and losers.

So they believe in Oxford Economics. This analysis firm recalls that the debate on a global corporate tax has been on the table a lot, but now “it seems different” because the Covid-19 pandemic “has had a profound effect on the public finances” of the countries, and with governments “scrambling for additional revenue” it seems like an “attractive source” for it.

The problem, the experts of this house point out, is that it can have very different effects between European states. In his opinion, there will be four major victims in the Old Continent, who will suffer “major blows to their public finances.” These are Luxembourg, Ireland, the Netherlands and Hungary.

Three of them “have relatively healthy public finances and the impact seems manageable”, but for Ireland the situation may be very different. “This reform will leave it as one of the most indebted economies in Europe, and could force the Irish government to make difficult concessions, especially since the high concentration of corporate tax revenue from a few key multinationals makes it vulnerable to decisions by offshoring, “says Oxford Economics.

However, he believes that the winners outnumber the losers, and “the largest economies will benefit the most.” According to the analysis of these strategists, in the Eurozone the net impact on the debt / GDP ratios “is positive, with an average improvement of 0.4 points on average driven by the largest economies.” Specifically, they point out that the debt-to-GDP ratios of Germany and France would fall by around 1.4 percentage points by 2028, while in Italy it will fall 1 percentage point and in Spain, 0.8 percentage points.

It should be remembered that the objective of the Organization for Economic Cooperation and Development (OECD) is for the negotiations on this global corporate tax to conclude successfully by mid-2021, which means that “there is a lot at stake in the coming weeks” , points out Oxford Economics. And it is that a series of elements and parameters on the design of the same still need to be agreed.

Specifically, countries must reach a consensus on the categorization of business activity and the income threshold to apply this rate, as well as on the number of residual profits that can be reallocated. The level of the global minimum tax rate must also be closed, although everything indicates that it could be 15%, which “is substantially lower than the 21% recently proposed by the United States.”

SOCIEDADES, A “RELATIVELY MODEST” SOURCE OF INCOME

Whatever the outcome of this debate, at Oxford Economics they have used different parameters to assess which countries would benefit and which would harm this tax. And his conclusion is clear: “With a few notable exceptions, corporate taxes are a modest source of income for most countries” in Europe. In 2019, corporate taxes generated around 15% of total tax revenue in Luxembourg and 14% in Ireland (which increased to almost 21% in 2020). The Netherlands had a smaller, but still important share of 9% of taxes in 2019.

The average legal and effective corporate tax rates are generally comfortably above 15%, the new benchmark level on the table. But the effective rates of Hungary and Ireland, of 10% and 12% respectively, are below that level.

And why will they be further harmed then? Very simple, because they are the countries where the US multinationals that can be affected by this global tax generate more income. The analysis of these experts, who have crossed data from places where these companies register profits in Europe, comparing them with the location of Facebook users and the income from e-commerce, two business areas that will probably be in the affected area, suggests that ” The Netherlands, Ireland and Luxembourg receive a disproportionately large share of the benefits, but the opposite is true for Germany, France, Italy and Spain.”

There are “big discrepancies” that will leave winners and losers. The introduction of this tax “would mean a loss of tax base for these countries,” they say in reference to the Netherlands, Ireland and Luxembourg, while Germany, France, Italy and Spain “will be the main winners.” And it is that “the combined percentages of these countries on the profits of US multinationals accounted for in Europe stand at 7.6%, while their combined percentages on Facebook customers and e-commerce revenues exceed 40%” .

In addition, recalls the analysis house, one cannot forget the “great contributions” of these multinationals to the economy of the Netherlands and, above all, of Luxembourg and Ireland. “These companies accounted for 44% of global employment in Luxembourg in 2018, 18% in Ireland, and 14% in the Netherlands, in all cases comfortably above the EU average of 11%. That same year, foreign-owned multinationals accounted for almost 26% of Luxembourg’s gross value added (GVA), around 43% in Ireland, and almost 18% in the Netherlands.”

For this reason, beyond the impact on public finances, “it is clear that the reform process could affect the economies of these countries and employment, especially if multinationals relocate their profits and investments as a result,” they influence. experts, who also draw attention to Hungary, which “has the lowest effective average corporate tax rate.” “Although Hungary relies relatively little on multinationals for tax revenue, foreign-owned companies make significant contributions to its economy, which means that the impact will be generally negative,” they conclude.

In any case, “everything will depend on how companies and countries respond to the changes” that are agreed. But the analysis shows that the impact will be “relatively large on public finances” for the four countries mentioned. The debt ratios of these countries are expected to be higher, with a cumulative impact on debt relative to GDP of more than 6 percentage points by 2028 in Luxembourg, less than 5 percentage points in the Netherlands and 2, 4 percentage points in Hungary.

In the case of Ireland, the impact on the debt-to-GDP ratio is less than 5 percentage points, but based on modified gross national income – “a more appropriate measure in this case, given the known GDP distortions related to the multinationals in Ireland “-, the impact is greater: almost 9 points by 2028.