On behalf of the French government, the Council of Economic Analysis (CAE) carried out an initial assessment of the various scenarios pertaining to multinational tax reform as discussed at the OECD. The note, prepared by economists Clemens Fuest, Mathieu Parenti and Farid Toubal, and published on Tuesday 19 November, calls for greater levels of ambition and simplicity.
The CAE has developed five scenarios in which it has assessed the impact of these reforms for six countries: France, Germany, the United States, Ireland, China and India. The simulations show that a profit-sharing regulation to redistribute profits in part to destination markets, as envisaged under the framework of ‘pillar I’ of the reform (see EUROPE 12345/11), would only have a negligible impact on tax revenues and a slightly positive impact on the appeal of most countries that are not considered tax havens.
Under this scenario, France's tax revenues would increase by only 0.1%, Germany would see a slight decline (-0.1%) and the results would be broadly the same for the other countries in the study.
According to economists, the idea of introducing a distinction between ‘normal’ and ‘residual’ benefits would only serve to complicate the process. The CAE therefore recommends rethinking the method by which residual profits are shared by allocating a fraction of the overall profits to the countries of destination of sales, and by using effective anti-abuse measures.
The effects of ‘pillar II’ of the reform, i.e. the adoption of a minimum effective tax rate, would, on the other hand, be much more significant. This would both reduce profit transfers and generate substantial gains in tax revenue for all countries, with little effect on their appeal, according to the note.
According to economists, one of the main challenges to be faced would be finding an agreement over the level of this minimum rate. Moreover, determining whether or not, for a multinational company, an entity that receives a payment meets the minimum tax test or not will involve a considerable administrative effort, which should ideally be based on a high degree of cooperation between tax authorities, the note emphasises. Nevertheless, they believe that the reform seems “politically feasible”, as it generates a “large number of winners”.
See the note (in French): http://bit.ly/2OupQLE (Original version in French by Marion Fontana)