Multinational corporations: hurdles on the way to a global minimum tax

More exchange of information with countries like the USA should help prevent corporations from exploiting tax loopholes. How far is the project of a global minimum tax?

Multinational corporations can often significantly reduce their tax burden by using different tax systems. There are always initiatives to combat tax loopholes. Today, the Bundestag is discussing the ratification of an agreement with the USA to improve the exchange of information on tax issues. Another step is the planned introduction of a global minimum tax.

Global players, national tax laws

It sounds brittle: “Agreement on the exchange of country-by-country reports”. The agreement with the USA is about an issue that is of great importance in the global economy – how can it be ensured that internationally active companies pay their taxes fairly.

“We have global corporations, but of course national control units,” says Katharina Beck, finance politician for the Greens. “It’s important to be able to exchange information very quickly. And that wasn’t the case before, it had to be done on request, every year. Now it’s automated, and that’s very positive.”

OECD requirements

The exchange of information is based on the requirements of the Organization for Economic Co-operation and Development (OECD). So-called transfer prices in particular play a role here, as a spokesman for the Federal Ministry of Finance explains. It is about how costs are distributed within a company across national borders.

In this way, profits can be shifted to countries in which particularly low tax rates apply through internal company offsetting. International agreements like the one with the USA should remedy the situation. The aim is to set standards for companies to prevent unfair tax competition.

“Of course, at best it should be replaced by the really big reforms that are now coming at OECD level,” says Rainer Kambeck, tax expert at the German Chamber of Commerce and Industry (DIHK). “They are planned to be implemented soon. It’s supposed to start next year.”

Taxes are due where the money is made

Two years ago, within the framework of the OECD, around 130 countries around the world agreed on a global minimum tax consisting of two components. Among other things, internationally active corporations – especially from the digital industry – should not only pay taxes where the company is based, but also where they do their business.

“The basic idea is that the so-called market states, where the profits are made, participate a little more in the total tax revenue,” says DIHK expert Rainer Kambeck. “The second thought of this second pillar is a worldwide minimum taxation, so that the tax system can be made fairer overall.”

Tax rate of at least 15 percent

Companies should pay a tax rate of at least 15 percent – many companies in Germany welcome this, since the tax rates in this country are higher. The Ministry of Finance and the Greens politician Beck emphasize that they are working on the quick and unbureaucratic implementation of the international agreements for Germany.

To this end, the federal government wants to introduce a law this year, implementation is planned for January 1, 2024. “Nevertheless, the United States have made tax breaks as part of the so-called Inflation Reduction Act and introduced minimum taxation that is not entirely in line with it,” says Beck.

This shows that there are still a few hurdles on the way to a global minimum tax. In particular, it must be clarified how high the assessment basis is, i.e. on which profit the minimum tax is to be paid. Tax breaks in individual countries can undermine the otherwise applicable rules.