International taxation is under review and the Canary Islands are observing the changes expectantly, because they may affect its unique Economic and Fiscal Regime and especially its potential to attract high added value investments. There are two pillars on which the recent principle of agreement signed by the G7 is based, that is, by the main economic powers of the world: the global minimum tax and the attribution of the tax authority to the country where the services are provided and not in which the parent company of the multinational resides.
For the Islands, if applied as initially negotiated, it would mean a risk of losing its main incentive lever to diversify the economy thanks to its low taxation. It would drag, for example, the possibility of promoting the creation of a “digital paradise”, to which the Minister of Economy, Nadia Calviño, referred in her recent visit to the Islands.
At the moment there is nothing lost, since there is still a long way to go before this new global tax planning is formalized. But the Canary Islands does not lower its guard and is already in contact with the Ministry of Finance so that the exclusion rules that are being considered take into account the Canary Islands tax singularities. From the outset, the global minimum tax would not apply to national entities, nor to companies that invoice less than 750 million euros, nor to those that carry out activities of normal or low added value. But those that interest the Islands the most due to their capacity to create employment or their transformative potential would be affected: patents, software or those activities related to knowledge, among others.
Without this fiscal tool, the Canary Islands would lose its main lever to influence the qualification of its production model. And, since neither the currency nor the taxes on the added value are controlled directly by Spain (but by Brussels), incentives are practically the only powerful mechanism that can be offered to large investors. And without it, the only margin to play with would come down to wages, social security, or income taxes.
Hence, the Canary Islands authorities cling to the exclusion rule to try to escape this limitation, which would prevent lowering the tax on corporate profits below 15%. This exclusion rule is based on substance, so if there is a normal return on assets and employees, this minimum tax will not be applied for activities with low and normal value added. But, as the principle of agreement is drawn up, they escape him, activities as interesting to capture as patents, software and activities related to knowledge, or the aforementioned digital paradise of Calviño.
Another sensitive issue for the Canarian REF is the lack of differentiation made by the G7 agreement when applying the global minimum tax between those areas of low taxation with real incentives, as is the case of the Canary Islands, from those other with illegitimate or pernicious incentives, the so-called tax havens.
The rethinking of international taxation has been described as “historic” and, in fact, it may mean a complete revolution with respect to global tax planning. This was relatively simple from the early twentieth to the sixties, when it was a form of taxation very close to the earth when applied to tangible products. But the system got complicated when patents emerged.
The premise that the predominant taxation would be the country in which the operator resides compared to the source where the income is received has been in force ever since. But the system became complicated again with the emergence of digital services, when most large multinationals sought to lower their tax bill by moving their headquarters to countries with more favorable tax treatment.
The lack of an agreement between the United States, a firm defender of the tax in residence (where the parent companies of the companies are), and Europe betting on paying taxes where the users who consume these services are, led to a tax war that is trying to put an end to with this global minimum tax. If an agreement is reached in the OECD and G20 countries, experts already warn that it will be very difficult for any country with low-tax areas to block the agreement. The way is, therefore, to anticipate and negotiate before the scope of the aforementioned exclusivity, for which it will be essential that Spain assimilate and defend the thesis of the Canary Islands.
A historic agreement. The reviews of global tax planning that the OECD has historically carried out have coincided, since the 1960s, with times of crisis, for the simple reason that revenue falls, taxes on consumption or income rise accordingly, and taxes Citizens react by provoking social and political pressure that provokes the fiscal revision. On this occasion, and after years of tensions, the finance ministers of the seven major world economies reached a historic agreement to prevent large multinationals from relocating their headquarters to another country where they have a much more favorable tax treatment, in addition to making them pay in the countries where they operate.
Canary Islands and Ireland. The Canary Islands, like Ireland, are among the group of low-tax countries and regions that fear being harmed by the agreement on the new global tax planning reached by Germany, Canada, the United States, France, Italy, Japan and the United Kingdom. The 15% figure on Corporation Tax profits is above the level of countries like Ireland and the Islands. The nominal rate in this country stands at 12.5%, while the Canary Islands pay 4% in their special areas if specific investment and employment conditions are met.
July, key month. The next meeting of the G20 finance ministers will be held between July 9 and 10 and will be key to materializing progress and knowing if the G7 proposal has sufficiently broad support. One of the hot spots to be resolved in the next meetings will be the so-called Google Tax, the tax on certain digital services that the US opposes and that for the EU should be one of the pillars of the new system.