G20 reach agreement on 15% Corporate Income Tax (IRC) over multinationals

In recent weeks the international Schedule has been very much filled with tax issues.

Specifically, the possibility of establishing a minimum corporate income tax rate, to be applied globally, which would be set at 15%, has been largely

At the latest meeting of the so-called “G20” – a group composed of the finance ministers and central bankers of the world’s 19 largest economies plus the European Union – a principle of agreement was announced for the implementation of a new regime aimed at changing the taxation of “multinational” companies.

The main objective is that this new tax regime could be joined by 130 countries and jurisdictions.

The G20 finance ministers and central bank Governors have met recently for two days in Venice and secured a political agreement to support this system driven by the Organisation for European Economic Cooperation (OEEC). The stated aim is to prevent multinationals, especially those that operate through digital platforms and therefore physical presence is not essential, from “evading” taxes or diverting their profits to tax havens. This new system is based in two pillars:

I) the allocation of a percentage / profits from the companies, particularly digital companies, to certain jurisdictions so that they pay taxes where they operate even if they have no physical presence; and

II) the application of a minimum tax of 15% to companies with a turnover of more than 750 million euros.

When analysing this agreement there are several comments to be made:

To start with, wanting 130 countries and jurisdictions to join seems, to say the least, ambitiously unrealistic. How can countries such as Ireland, Estonia or Hungary (or even Portugal), which have achieved significant volumes of foreign investment through reduced corporate taxation, be attracted to this regime?!

Secondly, building a scheme based on a nominal rate (in this case 15%), may not have much practical consequence.

The nominal tax rate is a “calling card”, but nothing more. A tax system is much more than just a nominal rate. Take Malta, for example, which nominal rate is extremely high – 35% – but, through a refund system applicable to companies with the characteristics of holding companies, has an effective rate that varies between 5% and 10%.

In fact, if we want to seriously analyse a tax system and its burden on taxpayers, we have to take into consideration other aspects such as:

1. the possibility of deducting expenses;
2. the system of tax benefits and tax reliefs;
3. the possibility of deducting losses from previous years or even of “buying” losses through merger (or other) operations;
4. the tax cost of labour – compulsory social security contributions to be paid by the Employer.

The same nominal rate of 15% will have a completely different impact on a state that taxes 100% of turnover than one that taxes only 60% (or any other percentage) of that same turnover.

On the other hand, by making this scheme apply only to companies with a turnover of more than EUR 750 million, it is clear that the aim is not to create a new scheme, but only to target certain (and a limited number of) companies that have relocated their operations from the so-called G20.

This tax, which in an initial version envisaged a rate of 25%, but which, at the suggestion of the USA, became 15%, will, in theory, enable the fight against tax evasion. This is because, in the view of its authors, the largest companies domicile their revenues where it is most favourable to them in tax terms, without having an effective presence in all the jurisdictions where they operate.

According to a study by the EU Tax Observatory, Portugal could collect more than 500 million euros this year if it taxed multinational profits at 25%, while the EU as a whole would receive nearly 170 billion euros.

If the EU adopted a minimum corporate income tax of 21% or 15%, the tax revenue collected would be, respectively, 98 billion euros and 48.3 billion euros, and with both rates, Portugal would receive nearly 100 million euros. Bearing in mind that, in 2020, tax revenue in Portugal was €43,220.3 million, what is the relevance of increasing €100 million (0.23%) without any counterpart in terms of direct investment in the country?

In short, not only is there still much to be explained about all the contours of this new regime but, given the known information, it will have little or no impact on most companies in Portugal since those that, in theory, could be covered have a physical presence in the jurisdictions in which they operate and are taxed accordingly.

Martinez-Echevarria Ferreira & Rivera has at your disposal professionals with the technical capacity to help you find the solution that best suits your personal, professional or business situation so that you can structure your activity properly, economically, regulatory and fiscally.