Marnix van Rij (CDA), outgoing State Secretary for Taxation and former tax specialist, made a special outpouring in the Senate earlier this month. The law that was before the Senate and became law shortly afterwards accepted, was “the most complex legislation” he had ever seen. “Entire generations of tax specialists and accountants will be working on this.”
The package of legislation introduced a minimum profit tax rate for companies in the European Union with a turnover above 750 million euros per year. Simply put: European multinationals must pay at least 15 percent profit tax in every country where they operate – so worldwide – from January 1, 2024. If they do not do this, the tax authorities in the EU country where their head office is located can ‘top up’ the underpaid tax.
This means a lot of extra work for companies. Multinationals often consist of hundreds of companies in dozens of countries, which often have different accounting rules. In all those countries, and from all those business units, they will soon have to report that at least 15 percent profit tax has been paid. Until now, companies often did not have to prepare separate annual accounts for each subsidiary.
That extra work is exactly the intention. The new EU legislation stems from agreements that 136 countries made in 2021 to combat global tax avoidance. One of those measures was the introduction of a global minimum corporate income tax rate. The idea is that if companies can no longer avoid their tax liability anywhere in the world, then it will no longer be worthwhile to funnel profits to a tax haven.
According to calculations by Tax Justice Network, companies and wealthy individuals now avoid 427 billion euros in taxes per year worldwide. The Netherlands plays a role as a ‘conduit country’: many companies send profits from subsidiaries via the Netherlands to a country without profit tax, such as Bermuda or the Cayman Islands. For example, the American tech company Google channeled at least 128 billion euros via the Netherlands to Bermuda between 2012 and 2019, virtually tax-free.
Some of the countries involved have backtracked over the past two years. A number of emerging economies – including India, Brazil and South Africa – fear that the plans will not generate additional income. The United States and China decided to introduce the minimum tariff later. When exactly is uncertain. The EU then took the lead and is now the first in the world to introduce the measure.
Differences between countries
Like State Secretary Van Rij, the Dutch Association of Tax Advisors (NOB) also finds the new legislation complex. “There are enormous differences between countries in the way annual accounts are prepared. Sometimes a company is not required to produce annual accounts at all. Companies must translate everything into this new legislation,” says Aart Nolten, chairman of the international tax affairs section of the NOB. “It will take multinationals time to adapt to this. In ten years it may have become established, but it will certainly be complex in the coming years.”
According to Tim van Brederode, affiliated with the tax law department of Leiden University, multinationals are very concerned about the new obligation. “Companies really need to look in every country: have I paid 15 percent tax? That is indeed more work.”
He takes with a grain of salt that the legislation would be too complicated. “These companies and their tax advisors often set up the most complex structures themselves. Setting up a hybrid avoidance structure via Ireland is no problem at all. They mainly say that because they don’t actually want it.”
Van Brederode sees another disadvantage of the minimum rate: growing inequality. “Not all countries have the control capacity or level of knowledge to deal with this type of multinationals.” Moreover, the introduction of legislation to impose the minimum rate is lagging behind, particularly in developing countries. This means there is a risk that the additional tax revenue will mainly end up in EU countries, he says.
In any case, the Tax Authorities expect that the revenues for the treasury will increase: thanks to the minimum rate, an additional 466 million euros per year will soon enter the treasury, the Ministry of Finance believes. The majority of this is because companies will more often leave their profits in the Netherlands, instead of channeling them to a tax haven, according to the ministry.
Ready on time
The Tax Authorities will be ready in time for the new legislation, says the Finance spokesperson: the necessary adjustments to computer systems will have been implemented before the first tax returns are received. The service has also set up a central expertise team to answer questions from companies and exchange information with tax authorities in other countries. The team currently consists of seven people, but should eventually grow to nineteen employees.
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