Global minimum tax: are the cheers too early?

The joy of the global minimum tax for globally active companies is great. But the real work is only now beginning. Because important questions about the implementation of the project remain unanswered.

As expected, the finance ministers of the 20 largest trading and industrialized countries (G20) have agreed that companies with an annual turnover of at least 750 million euros will in future have to pay a minimum tax rate of 15 percent on their profits. At the same time, a more equitable distribution of taxation is planned so that in future companies will not only pay taxes in their home country, but also where they do good business.

This regulation affects corporations or their business areas that achieve a minimum turnover of 20 billion euros and a profit of ten percent of the proceeds. It is estimated that around 100 companies worldwide are affected, above all the big American tech giants Amazon, Apple, Google, Facebook and Microsoft.

$ 200 billion more revenue?

According to calculations by the Organization for Economic Co-operation and Development (OECD), the introduction of a minimum tax worldwide could increase global corporate tax revenues by up to $ 100 billion a year. Another 100 billion could be raised through the plans for a fairer distribution of taxation.

The reform is expected to come into force in 2023. However, the agreement announced on Saturday is only a cornerstone. The OECD announced that details and the plan for implementation should be available in October at the earliest. Until then, the door is open to possible compromise proposals for those countries that have not yet taken part. According to reports, the “objectors” include the Caribbean countries Barbados and St. Vincent as well as the three EU countries Ireland, Estonia and Hungary.

Critics warn against premature optimism

Federal Finance Minister Olaf Scholz (SPD) is nevertheless optimistic that an agreement can be reached within the EU. “Because it is actually the case that we have already reached all agreements on tax avoidance on a global level in the past and then the EU has also understood them, including the countries that were skeptical,” he said on Friday in ARD morning magazine.

Critics warn against premature optimism. “The Federal Finance Minister’s jubilation comes too early. At the moment there are significantly more questions than answers,” said Bavaria’s Finance Minister Albert Füracker. It is still completely unclear on which assessment basis the minimum tax should be levied.

The President of the Institute for the World Economy (IfW), Gabriel Felbermayr, also sees a lot of work to be done by the finance ministers because the tax systems of the individual countries are very different, even within Europe. “Now it’s a matter of tying down the details,” said Felbermayr in an interview with the br. It is also important to first of all agree on a common definition of the term profit. This is much more difficult than setting a tax rate of 15 percent. “I think that we are taking a big step forward here, but that is certainly not the end of the journey,” said Felbermayr.

The Swiss government also complains that the central question of a clearly defined tax base remains unresolved. This raises the question: “15 percent minimum tax on what,” it says in a statement.

Attack on national sovereignty

In addition, there is still considerable resistance from some countries that have built their business model on low taxes, above all Ireland. From a Dublin perspective, a global minimum tax proposal is an attack on Irish sovereignty; after all, it is the most noble right of a state to determine its own tax rates. The current corporate tax rate of 12.5 percent is considered a guarantee of economic success in Ireland. For this reason, the large Internet companies Facebook and Apple in particular have set up their European headquarters in the country and created many thousands of jobs there.

According to a study by the consulting firm Oxford Economics, the reform could plunge Ireland into a deep crisis because of the loss of high revenues. The tax reform would also hit the Netherlands, Luxembourg and Hungary hard. Therefore, according to Felbermayr, there will have to be compromises in terms of the tax level, “so that an international agreement can also achieve a certain degree of harmonization in Europe.” By the way, there are already exceptions. The British financial industry will in all likelihood remain exempt from the minimum tax because it is already heavily burdened by Brexit and the associated regulations.

Hardly any income for Germany?

Experts also point out that tax systems of different levels are certainly also pro-competitive. That’s how it turned out Silicon Valley Developed into the center of the digital revolution in California because taxes were initially low. Now that the tax burden has increased, there is an emigration to cheaper Texas. More than 13,000 companies have left California in the past ten years, including such well-known names as Tesla, Oracle and Hewlett Packard.

Finance Minister Scholz is primarily concerned with ensuring that “the large corporations will in future do their fair share of financing our common good,” as he recently said. In Germany, however, the rain of money should be limited. While optimistic forecasts assume a single-digit billion amount of additional income, tax experts such as Christopher Ludwig from the Mannheim economic research institute ZEW are significantly more pessimistic. He estimates that fewer than ten companies will be affected by the new regulation in Germany. “For the German tax authorities, the additional tax revenue generated by such a reform is negligibly small,” he said at a panel discussion. However, the increased administrative effort for companies and tax authorities should not be underestimated. “It should therefore be observed very closely where expenditure and income drift apart disproportionately.”