faq
Today the Bundestag passed a law to introduce a global minimum tax for internationally active companies. What consequences does this have – for corporations and for the state?
The Bundestag today agreed on a global minimum tax for large international corporations. The factions of the governing parties SPD, Greens and FDP as well as the Union as the largest opposition party voted in favor. The Left and the AfD voted against it. It is “about one of the biggest reforms in the international taxation of companies,” writes the Federal Ministry of Finance on its website. What will this change – and what does that mean for the state’s revenue?
What rules are there currently?
Currently, the taxation of multinational corporate groups is still largely organized nationally. In other words: A company only has to pay taxes on its profits in the states in which it has a physical presence. The tax rates can be extremely different – even within Europe. While in so-called tax havens such as Hungary or Ireland they are nine and 12.5 percent, according to the Organization for Economic Cooperation and Development (OECD), Germany charges just under 30 percent corporate tax.
Why is there such a thing? Minimum taxation necessary?
It is common practice for many corporations to move money back and forth between subsidiaries in different countries in such a way that the tax burden is as low as possible. In states with high tax rates, profits are underestimated and in states with low taxes, they are high – for example through license payments for the use of brand names or patents. The ever-increasing digitalization also plays a role. It is now often possible to be economically active in countries without having a physical presence there, to which the taxation of income is linked.
Many states with average or higher corporate taxes are missing out on significant revenue as a result of these strategies. According to the Federal Government, the new global minimum tax is intended to help counteract this “harmful tax competition and aggressive tax planning” and to promote tax justice and competitive equality. “The race for the lowest tax rates will soon be a thing of the past,” hopes the traffic light coalition.
What exactly is changing now?
The reform of international corporate taxation consists of two pillars: firstly, where the tax is levied and secondly, how high it is. The first pillar According to the federal government, this includes a new system of allocating taxation rights to the tax jurisdictions in which the respective corporations generate their profits. The OECD is currently still working on this concept.
The second pillar is about the minimum corporate tax rate mentioned. Internationally active companies with an annual turnover of over 750 million euros will in future pay at least 15 percent taxes on all profits – regardless of where and in which subsidiary they arise.
How should companies be controlled?
If a group shifts profits to low-tax countries in the future and a subsidiary effectively only taxes them at, say, nine percent, the new rules will apply. In this case, the home country of the parent company has the right to claim the difference and to tax the profits from the tax haven at six percent. This is intended to ensure that all companies “make their fair contribution to financing the community,” according to the Ministry of Finance.
What preceded the reform?
As early as April 2021, US Economics Secretary Janet Yellen, who had just taken office at the time, called for a global minimum tax rate for companies – although this should still be 21 percent. “Together, with a global minimum tax, we can ensure that the global economy thrives on a level playing field in the taxation of multinational corporations,” Yellen said in a speech to the Council on Global Affairs.
The following summer, the G20 countries agreed on the minimum tax of 15 percent proposed by the OECD, to which a total of 138 countries agreed in October 2021. After months of negotiations and a temporary blockade by Hungary, the states of the European Union (EU) finally agreed on a uniform implementation at the end of last year. The second pillar of the reform was then legally anchored in the EU and must be converted into national law by the end of 2023. The Bundestag did this for Germany today after the government presented its first draft law in August.
What additional revenue can states expect?
According to previous information, the OECD expects the second pillar to generate additional revenue of around $150 billion per year. When it comes to the distribution of taxation rights, the details of which are still being worked out, the market states are to receive over $125 billion more annually. The EU Tax Observatory forecasts almost 50 billion euros in additional tax revenue for the European Union.
“We estimate that an additional 200 billion euros will flow into the coffers of the international community,” said Achim Pross, who was invited as an OECD representative to a meeting of the Finance Committee in mid-October. Germany also accounts for a notable amount of this.
And in Germany?
It is estimated that 500 to 600 companies in this country are affected by the law. The Ministry of Finance has not yet made its own calculations about the additional income, but has commissioned the Munich ifo Institute to do so. The result of the short expert report published in June: Germany will be a big winner from the reform.
In the period from 2024 to 2026, the state can expect additional tax revenue from the first pillar of an average of around 850 million euros to 1.7 billion euros per year. That depends on whether the incoming share is taxed at 15 percent or 30 percent.
Pillar two will also lead to an increase in tax revenue, the researchers continued. If the introduction of minimum taxation actually leads to a decline in tax-motivated profit shifting, they expect additional tax revenue of around 1.5 to 1.7 billion euros annually between 2024 and 2026.
What do experts say?
Experts call the introduction of a global minimum tax a “game changer” in the fight against decades of tax dumping by large corporations. But there is also criticism: the Institute of Auditors in the Finance Committee spoke of “one of the most complicated regulations” and called for simplifications. In addition, some believe that 15 percent is not enough. The percentage of minimum taxation is far too low, said left-wing politician Christian Görke. He described the bill as “sobering” and a “financial zero number”.
Whether and to what extent Germany can generate any income from minimum taxation depends on how low-tax countries react to the decision, writes the ifo Institute in its report. They would have the opportunity to secure the revenue from the additional taxation of the profits of companies based in their country by levying a “qualified national supplementary tax”. It must also be taken into account that companies could try to evade the scope.
In addition, according to experts, the tax gap between countries is likely to remain in principle – and tax havens will therefore continue to exist. Because: Above the 15 percent, competition can continue in the future.