G7 nations hope corporate tax accord will trigger global domino effect

Good morning and welcome to Europe Express.

Finance ministers from the Group of Seven industrial nations are hoping to agree the outlines of a deal on corporate taxation in London today, in a move they hope will add to momentum behind a broad global deal. We’ll unpack what a deal would enable, and what dominoes still need to fall before meaningful legislation can be set forth.

We’ll also explore the latest EU draft proposal for a carbon border tax, and particularly the contentious elements it conveniently leaves out.

And we’ll have a look at the growing Tea Party-like movement within the German Christian Democratic Union — and what that will mean for the post-Merkel era.

But before we get into any of that, a quick update on the no-nonsense European Public Prosecutor we wrote about here and here. Speaking to a group of Brussels-based journalists yesterday, Laura Kovesi said she is considering returning some of the €7m in extra funding her office has received, because she says it may not be used for hiring extra staff. “What am I going to spend it on, buying plants?” she asked.

The European Commission (which approved the extra funding) said it would review the request for extra staff in the coming months, once the caseload builds up.

A twist in the taxation tale

Finance ministers from the Group of Seven countries are tantalisingly close to forging a common position on corporate taxation, as they prepare for meetings in the UK today and Saturday, write Sam Fleming and Mehreen Khan in Brussels. 

Such a move would represent an important step towards a long-elusive shake-up of global corporate taxation rules, with the goal of curbing the ability of multinational companies to exploit low-tax jurisdictions to scrunch down their tax liabilities. 

But given the general excitement about the potential taxation shake-up, it’s worth examining a bit more closely what an accord at G7 level actually unlocks.

Such an understanding would, after all, encompass only a small (if influential) group of nations. How would this impact discussions at G20 level, and indeed talks among a far larger group of more than 100 nations under the auspices of the Paris-based OECD? 

First of all, what is likely to be settled in the next day or so? If all goes well, G7 finance ministers will reach an understanding on two key fronts: 

• A new right should be created to tax the very largest multinationals’ profits based on where they make their sales (dubbed Pillar 1) 

• A global minimum corporate tax rate should be set at an effective rate of 15 per cent (so-called Pillar 2)

The G7 countries are betting that an understanding at their level would, given the involvement of key players including the US, Japan and Germany, generate political impetus among the G20 countries to adopt a similar position. 

That said, the big powers need to tread delicately or risk appearing to railroad big trading partners among the G20 to fall into line. 

When it comes to the Pillar 2 minimum rate, having major powers including the US on board creates its own natural momentum towards wider acceptance. If smaller countries (take Ireland, for instance) were to resist signing up to the 15 per cent rate, the US could simply top up the difference when it levies taxes on a given company under its own regime.

On Pillar 1, the OECD countries need to sign up politically to the principle and then all 139 members involved in the tax process need to ratify for it to take effect. 

Enacting it within the EU is particularly complex. The European Commission has promised to propose binding legislation to enforce the measures within the bloc. Passage of laws on both Pillar 1 and Pillar 2 would require a unanimous decision among member states, however. 

Pillar 1 is particularly contentious, because it would be seeking to arrange the allocation of taxing rights between EU countries. That could end up being hampered by individual member states as they haggle over the details.

But the uncertainty doesn’t only lie in the EU. There is no guarantee that the Biden administration will be able to push the necessary legislation through Congress. As a result, a number of European states are retaining the right to implement a digital tax in their own jurisdiction if matters get snarled on Capitol Hill. 

The simple reality is that when it comes to international taxation, any big breakthrough tends to reveal a fresh set of hurdles just around the corner. 

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CBAM lacks ka-boom (for now)

Brussels’ has begun sketching out legal plans for how its novel carbon border adjustment will operate, but Europe’s big polluting industries are still left wondering how exactly it will protect them, writes Mehreen Khan in Brussels.

A leaked draft of the European Commission’s proposal for a Carbon Border Adjustment Mechanism (CBAM) confirms many of the things we already knew: the tool will be strictly limited to target a handful of imports such as steel, cement, power generation, and fertilisers. The system will require a complex and bureaucracy-heavy network of independent auditors to ensure foreign companies are accurately reporting the carbon footprint of said materials.

The CBAM is one of the most highly anticipated tools in the EU’s new green deal armoury. Trading partners like Russia and Ukraine are worried it will disproportionately target their companies, while the US is making noises about setting up its own version.

But this week’s leaked draft leaves out many of the crucial details that EU industries have been demanding. The tool has been hailed as a measure to protect European business from being undercut by foreign rivals who don’t have to abide by onerous emissions regulations or pay the EU’s domestic carbon price.

Crucially, groups such as the steel industry have demanded Brussels maintain the free carbon permits that many industries enjoy under the bloc’s emissions trading scheme. They argue that reducing these allowances to zero — as Brussels has said it will do — before the CBAM is set up will hit them with a doubly whammy of rising carbon prices and little protection from foreign competition.

Brussels’ draft doesn’t sketch out the relationship between the CBAM and how to manage free allowances. The text only refers to an undefined “transition” period whereby free credits are temporarily maintained. Separately, Europe Express has seen internal commission estimates which suggest Brussels is working towards a full phasing out by either 2030 or 2035.

The final decision will undoubtedly be subject to intense bargaining from Europe’s governments, which will need to decide how far to protect homegrown industries.

Chart du jour: Insurers lag on cyber attacks

After a flurry of high-profile hacks in 2021, including on Ireland’s Health Service Executive, insurers are edging away from underwriting cyber threats like ransomware. Instead, companies pin their hopes on governments to intervene and stem the flow of attacks. (Read more here)

German Tea Party

For years, Germany’s Christian Democrats have been wrestling with a small but noisy group of rightwingers in their ranks who want to take the CDU back to its conservative roots, writes Guy Chazan in Berlin.

This group, known as the WerteUnion, or the Values union, has long been the party’s problem child. Last Saturday it became a juvenile delinquent — with arsonist tendencies.

On that day its members elected Max Otte as their new leader — a man reviled by moderates in the CDU. A fund manager and prolific author, he’s notorious for praising the Alternative for Germany, a far-right party that most Christian Democrats see as beyond the pale. At the last Bundestag election in 2017, he said he would be voting AfD, describing Angela Merkel as unelectable.

The WerteUnion was set up in 2017 to represent disgruntled conservatives angry at the leftward drift of the CDU under Merkel, and especially at her “everybody-is-welcome” refugee policy.

But Otte’s election takes it into uncharted territory. Even ultraconservatives such as Hans-Georg Maassen, the former head of German domestic intelligence who has become a rightwing standard-bearer (as we wrote back in April), have problems with Otte: he announced this week that he was suspending his membership of the group.

The Otte election is fuelling fears in Berlin that the CDU could end up being hijacked by the right after Merkel’s departure from power later this year — just as the Republican party was by the Tea Party movement and the Trumpists.

Armin Laschet, the CDU’s candidate for chancellor in September’s election, has scrambled to distance himself from Otte, telling Deutschlandfunk radio this week that the WerteUnion is not a constituent part of the CDU and has “nothing to do” with the party. “I don’t share Herr Otte’s views and we will not be holding talks with him,” he said.

But politicians from other parties are demanding he go further — possibly by expelling Otte from the CDU. Lars Klingbeil, secretary-general of the Social Democrats, called Otte’s election a “putsch by the AfD loyalists” and called on the CDU to make a clean break with the WerteUnion.

“The CDU/CSU must be careful that the policy vacuum left behind by Merkel isn’t filled by rightwing populists,” tweeted Volker Wissing, secretary-general of the liberal FDP. 

Two things to watch today

1. G7 finance ministers gather in London for a two-day meeting

2. Slovenian president Borut Pahor is in Brussels

Smart reads

• The successful French-German relationship may be at the core of the European project, but the gulf between the two in defence and security policy is causing frustration in Paris and Berlin. (GC)

• After a recent EU deal on tax disclosures for corporations, new research suggests that investors focusing on those figures without a larger context may get the wrong impression, for instance in highly cyclical industries like air travel.

• When the G7 summit between world leaders takes place in the UK next week, one of the aims will be to come up with a global infrastructure plan to rival China’s Belt and Road Initiative, according to an internal report seen by Handelsblatt.

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