THE STATE OF THE EUROPEAN UNION REPORT. Europe in a period of transition

THE STATE OF THE EUROPEAN UNION 52 Among the proposals being considered, it is likely that one of them refers to taxation of the digital econ- omy, although there is some uncertainty regarding the taxation figure that will be chosen for these purposes.The legislative package on taxing the digital economy from March 2018 contained a proposal to tax certain digital services (“Google Tax”). Although it did not prosper in the Council in 2019 due to the veto from certain MS, this proposal was raised again in the road map for new European taxes due to the NGEU. However, and to avoid cases of double taxation on the same revenue, the Commission froze their “Google Tax” proposal in June 2021, while waiting for global negotiations to pan out within the OECD Inclusive Frame- work 3 on the so-called “two-pillar solution”. After two previous agreements from the G7 in June and the G20 in July, it was expected that an agreement would be possible on a definitive solution to the problem of taxing the profits of major companies during October. The first pillar of the OECD proposal being debated regulates the distribution of the taxation rights between territories on profits from major digital companies. This is therefore a case of determining how to assign these profits, that often do not need a physical support to be generated by the company. Second, a complex series of attribution standards 4 should be used to explain in what proportion the jurisdictions where the multinationals generate value have the right to tax this profit. Regarding the second pillar of the OECD proposal, it alludes to the no-less-important topic of determining an effective minimum tax rate for large transnational groups worldwide. This measure intends to slow down the race to the bottom among various jurisdictions to attract investment and certain revenue to their terri- tory. It would also assess the numerous tax incentives available to verify the added value that they provide in 3  The OECD Inclusive Framework not only includes members of the OECD. This forum comprises 139 countries and includes several de- veloping countries. 4  For these purposes, a sometimes-murky distinction is made between the multinational’s routine and residual profits. each case and that their application does not exceed the minimum global tax threshold. This point, key to reveal the collection potential of the two-pillar solution, has still not reached a complete consensus. The agreement principle talks about an effective minimum global rate of “at least” 15%. There are several countries, including the USA, that would like to raise the percentage to 21%. In any case, the digital tax proposal eventually pre- sented by the Commission will have to be aligned with possible worldwide agreements. And in the light of what is being debated within the inclusive framework of the OECD, the formula adopted by the EU in this field might not be limited to taxing the digital economy and might affect other sectors. Along this line, the EU might adopt a formula that guarantees minimum taxation of multinationals oper- ating on community territory, taking the percentage agreed worldwide as a reference. It might also dust off the Commission’s star proposal on tax evasion, setting a Common Consolidated Corporate Tax Base (CCCTB).The CCCTB has been renamed now as the BEFIT proposal in the recent Communication on “Business Taxation for the 21st Century”. 5 BEFIT implies a radical change on the current system, as it leads to tax harmonisation by deter- mining the taxable profit generated by major companies on EU soil on a European scale. The corporate tax base that transnational corporations pay is currently calculat- ed in compliance with each Member State’s diverging taxation codes, which leads to legal fragmentation that increases the chances of tax evasion. BEFIT also implies “consolidation” of the profits and losses that the multi- nationals obtain on EU soil. The resulting balance of this compensation is distributed among the MS according to a predetermined formula, composed of three parameters: sales, revenue and employment. This consolidation aspect of the BEFIT proposal, that assumes the “formulary apportionment system” in force 5  BEFIT, alluding to “ Business in Europe: Framework for Income Taxa- tion” . See: Communication on Business Taxation for the 21st Century | Taxation and Customs Union ( europa.eu )