The European Union has implemented groundbreaking tax reforms that establish 1. a minimum tax rate of 15% for multinational companies active in EU Member States as well as 2. intensify the fight against VAT-frauds. These measures, which came into force, January 1, 2024, aim to address the issue of profit shifting by large corporations and ensure fairer taxation practices across the globe.
The new framework is part of the global deal on international tax reform, known as the OECD/G20 Inclusive Framework, which was agreed in 2021. The EU has been a leading force in implementing these rules, and its early adoption is expected to set a high standard for other jurisdictions.
Under the new rules, multinational companies with combined revenues of over €750 million will be subject to a minimum tax rate of 15%. This applies to both domestic and international companies with a parent company or subsidiary located in the EU. If a subsidiary company is not subject to the minimum tax rate in a foreign country where it is located, the Member State of the parent company will apply a top-up tax on the latter.
Revenue of new tax reforms
The reform is expected to generate an additional €200 billion in tax revenues annually, which can be used to fund essential public services and investments around the world. It will also help to level the playing field for businesses, reducing the incentive to shift profits to low-tax jurisdictions.
“This new dawn marks a new era for the taxation of large multinationals,” said Paolo Gentiloni, Commissioner for Economy. “By lowering the incentive for businesses to shift profits to low-tax jurisdictions, the new rules will help curb the so-called ‘race to the bottom’ on corporate tax rates in the EU and globally.”
The EU’s implementation of these rules is a major step forward in the fight for fairer and more equitable taxation practices. It is a testament to the EU’s commitment to international cooperation and its dedication to ensuring that businesses pay their fair share of tax.
EU Strengthens VAT Fraud Measures
The European Union has implemented new transparency rules aimed at combating Value-Added Tax (VAT) fraud, a pervasive issue that drains billions from public coffers. These measures, which came into force, January 1, 2024, will empower tax authorities to identify and crack down on VAT fraudsters, particularly in the burgeoning e-commerce sector.
The new system centres on payment service providers (PSPs), such as banks, e-money institutions, and payment institutions, which collectively handle over 90% of online transactions within the EU. As of January 1, PSPs will be mandated to monitor the recipients of cross-border payments and, starting April 1, transmit data on entities receiving more than 25 cross-border payments per quarter to tax authorities. This information will then be aggregated in a new European database, the Central Electronic System of Payment information (CESOP), where it will be cross-checked with other data.
All CESOP data will be accessible to Eurofisc, the EU’s network of anti-VAT fraud specialists. This streamlined access will enable Eurofisc liaison officials to swiftly analyse the data and identify online sellers evading VAT obligations, including businesses operating outside the EU. Additionally, Eurofisc representatives can initiate appropriate actions, such as audits or deregistration of VAT numbers, to address these fraudulent activities.
“These new rules will play a crucial role in the fight against VAT fraud,” stated Paolo Gentiloni, Commissioner for Economy. “By leveraging data from PSPs, anti-fraud specialists will be able to more effectively identify and crack down on criminal behaviour in the e-commerce sector.”
These enhanced measures are expected to significantly reduce VAT fraud, which currently costs EU governments an estimated €50 billion annually. By tackling this financial haemorrhage, the EU can safeguard public funds and ensure equitable taxation across its member states.
