What are we talking about with the Corporate Tax reform?

The rate of 15% as a minimum tax on Corporation tax has become very popular in these times. In principle, the idea, Now sponsored by the Biden Administration is that the large multinationals also pay minimum taxes. Although there is much talk of minimum rates, the key point of the proposal is that they pay taxes where they actually generate the benefits. Generally speaking, the medium and large states where these companies actually make most of their profits have rates above 15%.

In Spain, the general corporate tax rate is 25%, and for banks and oil companies it is 30%, so the minimum taxation should not be in dispute. However, if we talk about effective taxationOne might wonder if companies, especially large ones, pay these rates or others in Spain.

Going to Annual Tax Collection Report published by the Tax Agency, we see that consolidated groups pay an effective rate of 19.07% on the tax base, while companies not integrated in groups pay an effective rate of 22.94% on the tax base. All this according to the latest, provisional data, corresponding to 2019, before the pandemic.

The key point of Biden’s proposal is that they pay taxes where they really generate the benefits

Effectively, the very big companies, which account for almost all the collection of the tax system, they pay a little less, depending on their tax base, than other companies, that is, small, medium and large. But the differences are not as high as is commonly believed.

The reasons why a company does not pay 25% cash (or 30%) if it is a bank or an oil company are fundamentally: tax benefits, such as deductions to encourage research and development, compensation for losses from previous years, and obtaining benefits outside of Spain, which under current law are 95% exempt.

Focusing on the first two reasons, in general and to a large extent, both the deductions and the compensation of negative tax bases are limited. For that reason, and not because there are no companies that have lost enormous amounts in recent years, the effective rates are not so far from the nominal rate of the tax, 25%. Here, introducing a minimum rate of 15% is not a novelty for the vast majority of companies, which, as seen in the average effective rates, are already paying a higher effective rate on the tax base.

However, you should be careful. For example, in general, there are no netting limits for negative tax bases when creditors forgive debts for example in a bankruptcy.

This forgiveness represents a loss for creditors, but a benefit for the debtor who owes less, but who usually does not have liquidity or much solvency. If, after forgiveness, the debtor is not allowed to offset his corporate income tax base with previous losses, then business restructuring operations will be severely hampered. For that reason, it should be careful and set exceptions for the minimum rate of 15%.

In general, establishing a minimum rate of 15% or another percentage is nothing more than a closing clause for the application of tax benefits and compensation for losses from other years. For that reason, and as all this is already limited, especially for the companies that bill the most, the reality is that we are not very far, as can be seen by looking at the average rates.

Establishing a minimum rate of 15% or another percentage is nothing more than a closing clause for the application of tax benefits and compensation for losses from other years

On the other hand, under normal circumstances, what a company cannot deduct one year, it can do in subsequent years. For that reason, the minimum rate, rather than a permanent tax increase, is simply a deferral of some tax credits. In reality, this measure only supposes a permanent tax increase if there are companies that systematically pay almost nothing, but given the limitations that already exist in the tax laws, this is very complicated.

Of course, if we take as a comparison parameter not the tax base of the tax, but the accounting result, then the question changes radically. If here a minimum tax is established on the accounting result, what is being done is to tax, in this case, at a rate of 15% the profits obtained in another country.

There are two types of problems here, one of a legal nature, since these benefits have already paid, or should have, in the country in which they were obtained. The other problem is that if these dividends are paid again, it may happen that they are simply not distributed. This is not a theory, as I already explained in the book Are we all the Treasury? when Apple decided, upon the death of Steve Jobs, to distribute dividends for the first time, it did not repatriate its foreign profits, and for which it would have had to pay 35% less what they would have paid. What he did was limit himself to taking out a loan to pay the dividends.

The problem of low taxation of some or many multinationals is not exclusively Spanish, but global. AND global problems often have no local solutions. Furthermore, this is a complex problem that has, unfortunately, neither quick nor easy solutions.

In any case, a minimum rate of 15% can be part of the solution, but it is not the fundamental question. The most important step is, as we said at the beginning, that the large multinationals pay where they really obtain the benefits and not in the never-never country.

*** Francisco de la Torre Díaz is an economist and tax inspector.

Reference-www.elespanol.com

Leave a Comment