In his presentation to the press on Monday 2 March of the new report from the European Economic Advisory Group (EEAG) entitled "Fair Taxation in a Mobile World", German economist Clemens Fuest criticised the complexity of the proposals currently under consideration by the OECD to reform the international tax system (see EUROPE 12432/12).
Overall, the report concludes that there is a need for coordinated reforms of tax rules at the international level, otherwise conflicts between countries will arise. Nevertheless, the proposals for redistribution of taxing rights under Pillar I of the OECD are "unnecessarily complex" in the view of Clemens Fuest, which could lead to new conflicts between countries over taxing rights.
According to the authors of the report, this complexity is mainly due to the division of profits into "current profits" and "residual profits". In fact, the proposals currently on the table provide that the allocation of taxing rights would mainly apply to residual profits. A fraction of these profits would be allocated to market countries, based on a formula that could, for example, take into account sales to final consumers.
However, the researchers suggest that a simpler option would be to use overall profits rather than residual profits as the basis for profit distribution.
"Complexity has the advantage of offering many margins for adjustment, which may help to generate political consensus", the report acknowledges, before adding that "complexity also has a considerable cost. In particular, it tends to create new tax avoidance opportunities."
Not very optimistic, the German economist also considered it "impossible" for the OECD to reach an agreement on the main political principles of a solution this summer (see EUROPE 12416/20).
Need for non-public country-by-country reporting
Another problem identified by the report is the lack of transparency regarding the distribution of the taxable profits of multinationals between the countries in which they operate.
However, according to the report, the European Commission's proposal for 'country by country reporting' (CBCR), which would oblige companies to make public certain accounting data such as their turnover (see EUROPE 12384/3), is not going in the right direction.
"In its current state, the data would only lead to misinterpretations and false conclusions", the researchers point out.
Worse still, without global coordination, publishing this data only for EU-based multinationals would put these companies at a competitive disadvantage and create incentives to relocate, explained Clemens Fuest.
Rather than making this data public, the researchers believe that they should be made available to researchers for economic analysis, while preserving the anonymity of individual companies.
To this end, they recommend that the EU should produce an annual report based on country-by-country data, combined with other available micro and macro data, to highlight the extent of tax payment by multinationals in European countries.
See report: https://bit.ly/3cl7g3P (Original version in French by Marion Fontana)