Collecting the tax deficit of multinational companies simulations for the European Union

This study estimates how much tax revenue the European Union could collect by imposing a minimum tax on the profits of multinational companies. We compute the tax deficit of multinational firms, defined as the difference between what multinationals currently pay in taxes, and what they would pay if they were subject to a minimum tax rate in each country. We then consider three ways for EU countries to collect this tax deficit. First, we simulate an international agreement on a minimum tax of the type currently discussed by the OECD, favored by a number of European Union countries, and by the United States. In this scenario, each EU country would collect the tax deficit of its own multinationals. For instance, if the internationally agreed minimum tax rate is 25% and a German company has an effective tax rate of 10% on the profits it records in Singapore, then Germany would impose an additional tax of 15% on these profits to arrive at an effective rate of 25%. More generally, Germany would collect extra taxes so that its multinationals pay at least 25% in taxes on the profits they book in each country. Other nations would proceed similarly. We find that such a 25% minimum tax would increase corporate income tax revenues in the European Union by about €170 billion in 2021. This sum represents more than 50% of the amount of corporate tax revenue currently collected in the European Union and 12% of total EU health spending. The revenue potential of a coordinated minimum tax is thus large. However, revenues significantly depend on the commonly agreed minimum tax rate. With a 21% minimum rate, the European Union would collect about €100 billion in 2021. Moving from 21% to 15% would reduce the potential revenue by a factor of two to about €50 billion. Second, we simulate an incomplete international agreement in which only EU countries apply a minimum tax, while non-EU countries do not change their tax policies. In this scenario, each EU country would collect the tax deficit of its own multinationals (as in our first scenario), plus a portion of the tax deficit of multinationals incorporated outside of the European Union, based on the destination of sales. For instance, if a British company makes 20% of its sales in Germany, then Germany would collect 20% of the tax deficit of this company. We find that that in such a scenario, using a rate of 25% to compute the tax deficit of each multinational, the European Union would increase its corporate tax revenues about €200 billion. Out of this total, €170 billion would come from collecting the tax deficit of EU multinationals; an additional €30 billion would come from collecting a portion of the tax deficit of non-EU multinationals. For the European Union, there is thus a much higher revenue potential from increasing taxes on EU companies than from taxing non-EU companies. To improve the fairness of its tax system and generate new government revenues (e.g., to pay for the cost of Covid-19), it is essential that the European Union polices its own multinationals. Last, we estimate how much revenue each EU country could collect unilaterally, assuming all other countries keep their current tax policy unchanged. This corresponds to a "first-mover" scenario, in which one country alone decides to collect the tax deficit of multinational companies. This first mover would collect the full tax deficit of its own multinationals, plus a portion (proportional to the destination of sales) of the tax deficit of all foreign multinationals, based on a reference rate of 25%. We find that a first mover in the European Union would increase its corporate tax revenues by close to 70% relative to its current corporate tax collection. Although international coordination is always preferable, a unilateral move of a single EU member state (or a group of member states) would encourage other EU countries to also collect the tax deficit of multinationals—as not doing so would mean leaving tax revenues on the table for the first movers to grab. This could pave the way for an ambitious agreement on a high minimum tax, within the European Union and then globally. This analysis shows that unilateral action can play a transformative role and that refusing international coordination is not a sustainable solution, since other countries can always choose to collect the taxes that tax havens choose not to collect. Our estimates are based on a transparent methodology that combines newly available macroeconomic data on the location and effective tax rates of multinational profits. We illustrate and validate our approach by applying it to firm-level data publicly disclosed by all European banks and 16 large non-bank multinationals. We find that European banks would have to pay 41% more in taxes if they were subject to a 25% country-by-country minimum tax. This estimate is in line with our finding that EU multinationals as a whole (all sectors combined) would have to pay around 50% more in taxes, thus suggesting that this number is indeed the correct order of magnitude. Companies such as Shell, Iberdrola, and Allianz—who voluntarily disclose their country-by-country profits and taxes—would also have to pay 35%-50% more in taxes if they were subject to a 25% minimum tax. This report is supplemented by a pioneering interactive website, https://tax-deficitsimulator.herokuapp.com. This new tool allows policy makers, journalists, members of civil society, and all citizens in each EU country to assess the revenue potential from minimum taxation on both domestic and foreign firms. Users can select various scenarios (e.g., international coordination or unilateral action), and a full range of minimum tax rates from 10% to 50%. All the data and computer code are available online, making our estimates fully reproducible. We plan to regularly update our findings, as improved and more comprehensive macroeconomic data sources become available, refined estimation techniques are designed, and more companies publicly disclose their country-by-country reports.