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Transfer Pricing News from the Week of September 20, 2021

21st September 2021

What do Developing Countries Think of the OECD’s Global Tax Proposals? 

Global tax reform debates continue—especially for developing countries. In fact, they’ve worried they wouldn’t fare very well under the Pillar 1 and Pillar 2 proposals from the beginning. Their issues? Let’s start with Pillar 1. Under the OECD’s plan, Pillar 1 reallocates 20% to 30% of residual profits generated by companies with turnover of more than 20 billion euros and profitability above 10%. Pillar 1 is estimated to impact the top 100 companies in the world. The G-24 group of developing countries says, that’s not enough—more income needs to be redistributed. In a statement on Sunday, September 19, the group claimed that “not less than 30%” of multinationals’ residual profits should be reallocated. The G-24 feels given that Pillar 1 affects only a handful of companies, less than 30% won’t make a meaningful difference for developing countries, which desperately need the revenue. The G-24 isn’t satisfied with Pillar 2 either—the group wants a global minimum tax that’s more than 15%. And while they haven’t said just how much higher, in the past, developing-country representatives have said as high as 25%. The OECD’s proposals are on track to be finalized at the end of October, when 140 countries will negotiate the last of the details.  

The EU Commission Wins an Appeal Regarding Belgium and State Aid 

With global tax reform on the horizon and a new U.S. tax proposal in the House, the issue of EU state aid may not rank that high in your latest newsfeed. But a recent decision by the Court of Justice of the European Union could bump it up on your list. In the state aid case, the Commission vs Belgium and Magnetrol International, the Court of Justice bounced a February 2019 judgment back to the European General Court for further examination. What was the case about? Excess profit tax exemptions. In 2004, the Belgian government offered MNEs that had relocated a key function to Belgium tax exemptions for excess profits—meaning the profits exceeded what a comparable third-party entity would have earned under similar market conditions. Still with me? The move lessened tax bills for MNEs by quite a bit—some companies decreased their corporate tax base by 50% to 90%. In 2015, the EU Commission launched an investigation into the practice. A year later, claiming they had received competitive advantages over others, the Commission ordered the Belgian government to recover aid back from 55 companies. One of those companies was Magnetrol International, which in an effort to have the EU Commission’s decision annulled, took the case to the General Court, who ruled in favor of Belgium and the taxpayer. The EU Commission appealed the decision arguing that the General Court made mistakes in their interpretation of what constitutes a state aid scheme. The Court of Justice agreed and sent the case back to the General Court to review the case again.  

Will Ireland Agree to a Global Minimum Tax? 

While most of the EU seems to be looking forward to a global minimum tax, Ireland has been notably opposed. “Not to worry,” was the attitude of EU Economy Commissioner Paolo Gentiloni, who said on an Irish radio show that he is confident that they will be able to reach some sort of compromise. He stressed that the advantages of doing business in Ireland aren’t limited to “a small difference in a corporate minimum tax.” (Ireland’s corporate tax rate is 12.5%, while the proposed global minimum corporate tax rate stands—at the moment—of “at least 15%.”) He stressed Ireland’s other advantages: a sound business environment, educated workers, and of course, English as a native language never hurts either. The Commissioner insisted his visit to the Emerald Isle on Monday (September 20) wasn’t to do any arm-twisting, but merely to discuss the importance of an agreement. During the visit, Irish Finance Minister Paschal Donohoe told the EU Commissioner that Ireland was trying to see if an agreement was possible, but he made no guarantees that Ireland would sign on.