As The EU And U.S. ‘Re-Think’ Corporate Tax, Multinationals Seek Clarity

Taxes

Coming to a corporate balance sheet near you: multi-jurisdictional complexity.

This week, in what must seem like a case of déjà vu, multinationals were once again put on notice that a tax reckoning is on its way. This time, it was the European Union gearing up to sharpen its pencils, as it introduced a plan for a new corporate taxation framework.

The proposal would change rules on not only how much multinational firms are responsible for paying, but also which jurisdiction’s coffers firms would pay into. The measure — Business in Europe: Framework for Income Taxation, or BEFIT — would create a single corporate tax standard and reallocate profits between the 27 countries that are EU members.

“It’s time to re-think taxation in Europe,” Commissioner for Economy Paolo Gentiloni said. “BEFIT will cut red tape, reduce compliance costs, minimize tax avoidance opportunities, and support EU jobs and investment.”

The EU also said it would seek to make shorter term changes. According to reports, that includes proposing legislation to combat the misuse of shell companies, and to create incentives for companies to favor equity more than debt.

This call to arms by the EU comes in the midst of some major global upheaval in the world of corporate tax. Just this past week, the U.S. Treasury Department called for a global minimum corporate tax rate of at least 15% which is aimed at stopping multinationals from profit shifting. The 15% rate marks a reduction from the original 21% that U.S. Treasury Secretary Janet Yellen proposed in April, which had come under scrutiny from some nations as being excessive.

What’s more, in June, the Organization for Economic Cooperation and Development (OECD) will lay out rules on where and how much to tax large multinational corporations like Google, Amazon, and Facebook, particularly on intangible assets, such as online sales that span two different tax jurisdictions.

Last month, I wrote that the real challenge of sweeping changes to global tax laws for multinational corporations is making projections in the face of uncertainty, and being ready to hit moving compliance targets today that may be wildly different tomorrow. The EU proposal all but seals that fate for corporate tax departments. While EU officials have given an indication as to some of what BEFIT would include, the plan has been promised to be presented in detail “by 2023.” That’s a timeline that has to be considered a worst-case scenario to CFOs and corporate tax professionals around the globe.

In what’s akin to trying to tap dance on the head of a pin, multinationals are faced with a complex dilemma: How to get ready for sweeping changes that are almost certainly coming without any real clarity on what those changes will be, all while trying to manage the optics of global tax compliance and trying to recover from a pandemic.

Just like the U.S. effort to curb tax base erosion, BEFIT will require multinationals to model global tax exposures under several different scenarios, even as real legislation is likely going to take years to arrive. And when they do arrive, how exactly will these new standards align with OECD guidance, and what – if any – impact will they have on any other global tax treaties?

It will be a painstaking process, one that is bound to create a swell of corporate tax volatility. But firms have little choice than to simply be as vigilant as possible, all while waiting for some much-needed clarity. While the next steps aren’t written in stone, one thing seems to be clear: global corporate tax is about to undergo a major change. Multinationals cannot afford to be caught off guard.

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