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AB 2000 studies

Alain Boublil Blog


Globalization and the tax system

Among the numerous critics globalization is the purpose, there is the possibility granted to international companies to largely escape taxes through waving with the differences between countries tax systems where these companies are operating. The problem overpasses the tax heavens issue which allowed for a long time physical persons to avoiding to pay their taxes thanks to the secrecy the banks located in these countries were offering to them. If substantial progresses have been accomplished to reduce, if not to put an end to these practices, the issue remains unchanged for the enterprises and the amounts at stake are much more important.

G7 countries finance ministers have just agreed to set companies minimum taxing rules but we are still far from having reached to a concrete result. For near ten years, OECD members are working on projects of fiscal harmonization. But even if the necessity to find a solution was more and more recognized, no concrete and significant measures, applicable by the State-members, have yet been adopted.

It is the Joe Biden election which has changed everything for two reasons. He has first made his country coming back in the multilateral discussions with which his predecessor had broken like the Paris Agreement. He then decided to launch a huge rebound plan he cannot finance only with a public indebtedness increase. He had to find new resources, which were politically acceptable like the taxation of the biggest companies. But these ones were largely escaping taxes through the use of fiscal optimization. So it was necessary to put an end to these practices through an agreement with the related countries.

The discussion inside the G7 group is just a step. So the Heads of States who are meeting this week would support their Ministers proposals. Then, it will be necessary to widen the discussion to the major economies inside the G20 and after, inside the OECD. At last, each State will have to include the negotiated principles in its own legislation, which will be a long and complex process nobody can give the calendar. As an example, the European rebound Plan adopted by the Heads of States last autumn has still not come into operation because it had to be voted by the European Parliament and then be ratified by each State.

G7 Finance Ministers proposal includes two points. It is first about the fixation everywhere of a corporate tax rate of at least 15%. Then it is proposed to align the paid tax in a country on the profits really realized in that country for the major companies when their margin rate overpasses a certain level. But the advantages offered by these proposals risk to be illusory. What is determining the tax to be paid is not only the rate but also the basis. In France its definition takes hundreds of pages in the Tax code. Atop of that, each Finance bill includes new items. It is quite unrealistic to imagine that it will be possible to reach a harmonization between all the countries on the corporate taxes basis. The second proposal targets, without saying it, digital giants. This one would be easier to put into practice because it will concern a limited number of companies and the States have at their disposal the technical tools to make the principle adopted. But it will take time and will generate a lot of contentious.

These projects, for a large share, are decided under a personal promotion logical. Political leaders will not deprive themselves, after the coming international meetings, to utilizing them. They will valorize in front of their own political opinion, especially during a pre-electoral period as in France and in Germany, their commitments to find the remedies to globalization defaults. But we must not be naïve. To suppose that the fixation of a minimum tax rate is, at the end, decided, it will take years to be put into application and it will take even more others years to get a concrete result in the fiscal receipts of the States which are the victims of these fiscal de-localizations.

It is why it will be necessary to go further and to directly target the States which are taking profit of these disputable practices to the detriment of the other States. The principle according to which we take sanctions against the countries which do not comply with rules or international conventions should be progressively extended to fiscal issues in case of an evident capture of resources. In the European Union, we have two well identified cases, Luxemburg and Ireland.

Luxembourg has made a specialty in the creation of “mailbox-companies”. They have practically no activity there and have just one or several banking accounts, in charge of receiving remunerations, for instance for the use of a patent or of a brand, coming from subsidiaries in the other countries where they are implanted and have a real activity. These amounts will be considered as charges in the accounting of these subsidiaries, which will reduce their taxes in the countries where they do business. But these artificial profits created in Luxembourg, them, will not be taxed. The European Union has not been able to put an end to these practices because the unanimity is necessary regarding direct tax issues. But each mailbox company must have a manager. So it is not rare that the same manager has hundreds of mandates, which very well shows the artificial character of the activity of these mailbox- companies. The good answer would be then to adopt a directive or to make the European Parliament adopting a text aligning the authorized number of mandates of the managers to the one of the directors of a company. The number of mailbox companies would diminish in a spectacular mode because it would be necessary to recruit thousands of directors.

The Irish case is different. The very low level of the tax rates has incited hundred of American and Japanese companies to localizing there the profits realized with the sale of their products in the European Union. It is especially spectacular for electronic and pharmaceutical industries. They manage their transfer prices. In most of the cases, the activity in Ireland is limited to assembly. Pieces or active principles are sent there with a very low price and the final product is exported to Europe at an artificially high price in order to minimize the profit made by the local subsidiary and to pay the lowest possible tax. The whole margin is done in Ireland where the local subsidiary takes advantage of the very low corporate tax rate.

During the 2008 crisis, Ireland was near bankruptcy and had to appeal to the support of the euro-zone State members. But these ones did not dare to make pressure on the country to abandon these practices. Tensions appeared at the occasion of the Brexit about the Irish border offer to Brussels a second opportunity to make stopping this fiscal receipt inveigling which amounts every year to tens of billions euro.

International meetings are useful, and not only to allow leaders who participate to them, to put them into value. But regarding fiscal issues, they won’t be enough. It is only through targeted actions supported by the international community against countries which have a questionable fiscal behavior that we will be able to put an end to it. The fight against fiscal optimization would then attenuate the critics against globalization and would reinforce the support to the European project.       




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