Global taxation/tax avoidance

“Taxation has to keep pace with our ever-evolving economies and our priorities” (Valdis Dombrovskis, Executive Vice-President of the European Union for an Economy that Serves People).

The year 2021 is proving to be a very busy year in terms of taxation in Spain and abroad. In addition to the elements that have been driving tax systems in recent years, such as concern about the effects of the globalisation of the economy on business tax bases, economic digitalisation and the fight against harmful tax competition, there is now the dramatic fiscal impact of the COVID19 pandemic on revenue and expenditure, which some see as a unique opportunity to reform tax systems (Draft Gruffat Report/Subcommittee on Fiscal Affairs of the European Parliament). This would explain why projects that were practically at a standstill or making difficult progress, weighed down by underground resistance, suddenly regain vitality, like exhausted runners arriving at the table where isotonic drinks await them.

President BIDEN has, with the stroke of a pen, rendered unreasonable those who opposed the OECD’s approaches to digital taxation and minimum taxation of multinational companies, arguing the need for a global agreement, which the Trump Administration never wanted to facilitate. The Biden Administration has confirmed its willingness to reach such an agreement, and soon. Specifically at the G20 meeting in July. And an agreement at that level is capable of energising the concept of a minimum tax, which has met its main opposition in some EU countries.

The US position is not a simple rectification of its approach in the work of the OECD. It must be seen in the context of the proposals for recovery from the economic consequences of the pandemic that were put forward in President Biden’s election campaign, which, among other things, considered an increase in taxes for corporations and high-income individuals to offset part of the cost of the economic recovery plans. Specifically, this would involve establishing an IS rate of 28%, a minimum tax of 15% on the global accounting profit of business groups and doubling (21%) the current minimum tax (15%) on profits obtained by American subsidiaries abroad, and although the changes that are sought with respect to the taxation of individuals are not insignificant, they do not need to be implemented, which are not insignificant, the United States does not need global accompaniment, for those affecting corporate taxation it needs a coherent international context, which, as life and international leadership would have it, is exactly what it has systematically denied its OECD and EU counterparts in recent years. Thus, the prospect of minimum global taxation starting at 15% in corporate taxation is beginning to become more visible. The position of the United States on the so-called GOOGLE tax, also the subject of OECD work and individual actions by several EU states, but a fiscal “casus belli” for the United States so far, remains to be clarified, although it seems logical that its application should be studied in the context of the implementation of a future minimum corporate tax. It is clear that Washington will also want to lead this debate because it is not willing for its companies to be the only ones harmed by European digital taxes, so we will have to know in detail what its thinking on the matter is. There is talk of a proposal already circulated to some OECD member countries.

The change of scenario has had immediate repercussions in Brussels and the Commission has wasted no time in approving (18 May 2021), a Communication to the Parliament and the Council on Business Taxation for the 21st Century announcing the withdrawal (in 2023) of “the unsuccessful” proposal for a common consolidated tax base for corporate taxation and a new framework for corporate taxation in the EU (BEFIT) that will establish a single regulatory code for the EU in the field of corporate taxation. Large companies will be required to publish their actual tax rates; the abusive use of shell companies will be prosecuted; and there will be tax incentives for companies to finance their activities with equity rather than debt, which is not generally new in recent work streams. What is new is the “Commission Recommendation of the same date on the tax treatment of losses incurred during the COVID-19 crisis”, adopted together with the previous recommendation, which urges Member States to allow losses in 2020 and 2021 to be offset against the profits they made in the three previous years and at least in the previous tax year, i.e. 2019. The maximum amount of such offsetting would be €3 million per loss-making tax year, highlighting the measure’s focus on small and medium-sized enterprises.

Along with the withdrawal of the proposal on the consolidated tax base, the other major piece of news, taking into account what has been said about Washington’s interests, would be the proposal to create a digital tax as an own resource of the EU budget, independent (?) of the forthcoming global agreement on corporate tax reform. The current proposals on Digital Services Tax and Significant Digital Presence will therefore be withdrawn. Let’s see what the Americans say.

While the hurricane of global tax reform moves up a notch, other more modest but no less worthy of consideration fiscal realities, due to their proximity to us, among other things, make their mark in 2021 and should be recorded as tax news.

The Colombian tax revolt takes us back to other historical moments in which taxation or tax collection was the fuse capable of altering the course of history. It seemed that these things could no longer happen, that democratic institutions are capable of channelling the fiscal debate, but here we have the case of Colombia, a country that, with the advice – of course – of the International Monetary Fund, embarked on a review of the tax system, increasing taxes on the middle class and proposing the application of VAT to basic necessities, basic public services and other exempt services, which provoked an unexpected popular response, with demonstrations and deaths, which has shaken the government and Colombian society. For the time being, the Finance Minister (Alberto Carrasquilla) and his team have had to leave the government and President Duque has announced the withdrawal of the projects for reconsideration, but social unrest has continued to manifest itself in other directions, disrupting the regular functioning of state institutions and pitting civil society against the armed forces and the police. Let us hope that the situation can be redressed by repairing the damage caused, but it is worth reflecting on the case of Colombia when thinking about fiscal policy, which is why I recommend David F. Burg’s interesting, though difficult to find, book: A World History of Tax Rebellions.

Within Spain, the Autonomous Community of Madrid presents a case of the political-electoral effects of a tax model, on the occasion of the elections that took place in May. Although it is clear that taxes do not totally determine the direction of the vote, let us be clear that many citizens, ideological questions aside, voted with their eyes fixed on the low tax model developed by the Partido Popular over a number of years in the taxes on which it can act: personal income tax, wealth tax and inheritance tax, in other words, the hard core of personal progressivity. The threat of altering this status quo in the tax reform being prepared by the Ministry of Finance with the advice of a Commission of expert academics and the central government’s declarations on the taxation of the Autonomous Community, placed the socialist candidate in an impossible position which, despite his personal stature and talent, dragged him to a resounding defeat in the same elections he had won comfortably two years earlier. The “erratum” on the suppression of the joint declaration in the IRPF culminated a chapter of political errors with easily intuible electoral consequences (middle and low incomes). We will never know, because it is impossible to measure this variable of the vote, whether or not taxes were the deciding factor, but it is difficult for any dispassionate observer to deny that they had an influence.

The Commission of Experts will not be able to tell us much about Corporate Tax in view of the reality we have just described above, nor about the indirect taxes on which the European Commission is in charge, although it can try to place itself within the framework of what is decided globally or at the European level, but it could try to establish the priority principle that the hard core of progressive direct taxation should be the same for all Spaniards (the equal collective tax effort that López-Casasnovas said a few days ago in LA VANGUARDIA, but applied to progressive direct taxation) and how this can be achieved, given the consolidated territorial structure of the State. The competent tax authorities will have to decide together whether to lower or raise the tax rate. Because what will not go backwards in the current political circumstances is the level of competence achieved by the different Autonomous Communities. If this issue is not addressed, what remains is the extension of the so-called environmental taxation, which, with all due respect, is predetermined, at least in part, in the Recovery, Transformation and Resilience Plan (Component 28).