In Venice, the finance ministers of the G-20 countries supported the historic tax agreement of 131 countries. They want to end the profit shifting of multinational corporations and secure tax revenues. In particular, the tremendous dynamism of digital businesses has increased concerns in many countries about declining tax revenues. Because digital economic models are complex, very mobile and difficult to reconcile with current taxation. Because it was designed primarily for the manufacturing industry.
Above all, many people celebrate the planned global minimum tax. But are these reforms really necessary? There are already anti-abuse regulations similar to the planned minimum tax system. In all EU countries, these rules already put an end to pure tax evasion tactics. More importantly, there is a better way for states to get more money.
Consistent collection of sales tax would be an ideal way to secure tax revenue. If fraudulent sales tax carousels are combated, states can generate significantly more revenue than from planned corporate tax reform. In addition, sales tax revenue goes directly to what are called market states, that is, countries where customers live but businesses do not have branches. No new complex method of profit sharing is required to apply sales tax.
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Christoph Spengel works at the Center for European Economic Research (ZEW) and is a professor at the University of Mannheim.
(Photo: Anna Logue / oh)
A systematic modernization of international tax principles is undoubtedly necessary to secure national tax revenues and encourage new investments. But international cooperation threatens to produce far too far-reaching reforms and to exceed the bar.
The political ambition to implement fundamental corporate tax reforms is very strong. Over the past two years, the OECD has been developing two-part tax reform plans at breakneck speed, which finance ministers in Venice have now encouraged. The details show how complex the project is.
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Christopher Ludwig is a researcher at ZEW.
(Photo: Michael Weiland / oh)
The first part provides as follows: Part of the profits of very large companies must be taxed in the states in which the companies make their sales. This should allow states with large consumer markets to participate more in the group’s profits. For now, the reform should only concern companies with at least 20 billion euros in turnover and a return on turnover of more than ten percent. In Germany there are less than ten companies and in the world there are just over 100 companies.
If this small number of affected groups remains, the planned redistribution of taxing rights on part of the group’s profits will not generate significant income. As a powerful exporting nation, Germany will forgo some of its own tax rights and, in return, will have to assert tax claims against foreign companies whose income can only be verified by foreign tax authorities. Controlling the distribution of profits on the basis of income and the international coordination of taxing rights take much longer for financial administrations in all countries. It is highly doubtful that any additional income from the new taxing rights of the large merchant states could offset the high administrative and fiscal costs. Documentation of sales for each exporting country is also a huge extra effort for companies, and not all companies have the digital infrastructure to be able to produce granular reports on sales in each exporting country.
The second part of the reform package is the introduction of a global minimum tax. It is a sharp sword in the fight against profit shifting of multinational companies and against the economic model of tax havens. The results of the negotiations in Venice confirm the political will to achieve an effective tax rate of at least 15% in each state. If the taxation of the parts of the group remains below 15 percent, an additional tax must be paid in the country of the headquarters of the group. In addition, the tax deduction of intra-group payments to subsidiaries with low tax rates should be avoided. The tax rate is the ratio of national tax burdens to local pre-tax profits.
Another major obstacle before the implementation of the reform project is to agree on the exact way in which the profit before tax will be determined. Within the EU, a draft uniform rules for determining taxable profits failed a few years ago. As an alternative, the use of internationally harmonized financial reporting regulations does not take into account specific tax considerations. Many countries also use targeted tax incentives to promote research and development and investment in green technologies. These can lower the tax burden and the national tax rate below the specified tax level and trigger subsequent taxation. Investment incentives that deserve to be supported are ineffective.
The success of the minimum tax depends on the possibility of reaching a global consensus. As soon as individual states waive the minimum tax level or offset the increased tax burden with new non-tax subsidies, it becomes attractive for large companies to consider moving their headquarters to those states. The much-maligned tax competition between states will not be stopped by this reform either, but will only be slowed down by 15%.
The two parts of the reform package must be implemented together. It is only through international cooperation that the tax system can keep pace with the economic developments of globalization and digitization. Going it alone at the national level, like the digital taxes implemented in the UK and France, adds complexity to the tax system and can negatively impact investments. After all: the European Commission is considering introducing a special fee for digital activities on hold at the moment. This not only prevents American digital companies from double taxation, but also does not hinder the digital transformation of the economic models of European companies. German automakers and mechanical engineering companies are also increasingly marketing digital services without being digital companies per se.