Taxing Multinationals Across Borders?

On Nov. 8th, 2022 the European Court of Justice, EU’s highest court, overturned a tax ruling against Fiat Chrysler from 2015. The decision annuls the EU commission’s 2015 finding that Luxembourg granted selective tax advantages to Fiat through a transfer pricing ruling. The commission said the deal in 2015 amounted to a state subsidy and thus ordered the Luxembourg government to recover the equivalent of about $30 million from the company. This decision follows similar reversals in tax cases in the past few years, cases involving Starbucks Corp and Inc. In 2019, EU’s second-highest court ruled that Starbucks did not benefit from illegal state aid in the Netherlands. In 2021, the same court made a decision in favor of Amazon, stating that EU regulators failed to show that Amazon gained illegal advantages from tax dealings in Luxembourg. The European Commission has appealed the Amazon ruling to the European Court of Justice. 

As emphasized in the above-mentioned cases, the European Commission is committed to ensuring that fair competition is not distorted in the bloc through illegal tax breaks to multinational corporations. As the European Commission monitors and decides if state aid complies with EU rules, the above cases in particular concern Article 107 (1) of The Treaty on the Functioning of the European Union (TFEU), which prohibits companies from gaining unfair advantages over their competitors through government support. The Treaty generally prohibits state aid unless it is justified by reasons of overall economic development. 

In response to the Fiar Chrysler decision, the European Commission released a statement demonstrating its continued commitment to tax legislation amendments among member states. The Commission works with member states to address tax loopholes and ensure tax fairness and will continue to monitor the EU state aid rules. The Commission’s ongoing efforts to ensure that multinational corporations do not gain unfair tax advantages spurn the recent global concern of loose tax rules for international technology giants. Notably, last year in 2021, the G-7 — Canada, Germany, Italy, France, Japan, the U.K. and the U.S. — agreed that businesses should pay a minimum tax rate of at least 15% in each of the countries in which they operate. While almost 140 countries agreed to the 15% minimum tax rate, the implementation of this policy has faced several challenges.  

Many governments are waiting to see how G-7 nations would implement the policy, especially in the U.S. with a divided Congress. 2023 was set as a target for implementation, though many tax experts believe to be too ambitious. While the global minimum corporate tax may continue if smaller countries fail to pass new laws, the failure of larger economies, such as the U.S., to implement legislation would greatly debilitate the agreement. There has been substantial political pressure against a global minimum corporate tax as businesses, with Cisco Systems Inc., Bank of America Corp. and Texas Instruments lobbying against the tax. The EU has also struggled to move forward with implementation. Unanimous support is required among 27 bloc members for the EU-wide implementation; however Hungarian parliament continues to affirm its opposition to global minimum tax on corporations. 

The ongoing friction between European countries and U.S. over taxing U.S. tech giants has further thwarted implementation of the policy. During ongoing talks on international tax rules, some European officials argued that U.S. tech giants should pay more tax in Europe and reallocate taxing rights to where the product is consumed. Specifically, some European countries proposed their own taxes on U.S. digital services and products. In response, the U.S. rejected such proposal and threatened to respond with tariffs on imports from Europe. 

Nonetheless despite ongoing challenges, there has been some progresses. The Organization for Economic Cooperation and Development (OECD) released details on central components of the agreement, including the “undertaxed profits rule.” The rule allows participating countries without a minimum corporate tax rate to increase the company’s rate to 15%, creating financial incentives for non-participating countries to join the agreement. 

While the future of taxing multinationals across borders remains uncertain, the European Commission continues to monitor how member countries utilize state aids and OECD proceeds with detailed plans for global corporate tax.