In Venice, the finance ministers of the G-20 countries backed the historic tax agreement of 131 countries. They want to put a stop to the shifting of profits by multinational corporations and secure tax revenues. In particular, the tremendous dynamism of the digital corporations has increased the concerns of many countries about falling tax revenues. Because digital business models are complex, highly mobile and difficult to reconcile with the current tax system. Because it was designed primarily for the manufacturing industry.
Most of all, many people celebrate the planned global minimum tax. But are these reforms really necessary? There are already anti-abuse regulations that are similar to the system of the planned minimum tax. In all EU countries, these rules are already putting a stop to pure tax avoidance tactics. And above all: there is a better way for states to get more money.
The consistent collection of sales tax would be an ideal means of securing tax revenue. If fraudulent sales tax carousels are combated, states can secure significantly more income than through the planned reform of corporate taxation. In addition, income from sales tax directly benefits the so-called market states, i.e. the countries in which the customers live but the corporations have no branches. No new, complex profit sharing methods are required to apply sales tax.
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 in order to secure national tax revenues and encourage new investments. But international cooperation threatens to produce far too far-reaching reforms and overshoot the mark.
The political ambition to implement fundamental corporate tax reforms is very strong. Over the past two years, the OECD has developed blueprints for the two-part tax reform at a breathtaking pace, which the finance ministers in Venice have now encouraged. The details show how complex the project is.
Christopher Ludwig is a research associate at ZEW.
(Photo: Michael Weiland / oh)
The first part provides for the following: Part of the profits of very large corporations should be taxed in the states in which the corporations generate their sales. This should allow states with large consumer markets to participate more in group profits. For the time being, the reform should only affect corporations with at least 20 billion euros in sales and a return on sales of more than ten percent. That’s less than ten groups in Germany, and a little more than 100 groups worldwide.
If this small number of affected groups remains, the planned redistribution of the taxation rights to parts of the group profit will not generate any significant income. As a strong export country, Germany will forego some of its own taxation rights and, in return, will have to enforce tax claims with foreign corporations whose income can only be checked by foreign tax authorities. Checking the revenue-based distribution of profits and the international coordination of taxation rights are becoming significantly more time-consuming for the financial administrations of all countries. It is very doubtful whether any additional income from the new taxation rights of large market states can outweigh the high administrative and fiscal costs. Documentation of sales for each exporting country also represents a considerable additional effort for corporations. Not every corporation has the digital infrastructure to be able to produce granular reports on the 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 by multinational corporations and against the business 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 percent in every state. If the taxation of certain parts of the group remains below 15 percent, additional taxation should be made in the country of the group headquarters. In addition, the tax deduction of intra-group payments to subsidiaries with a low tax rate is to be prohibited. The tax rate is the ratio of national tax expenses to local pre-tax profits.
Another major hurdle before implementing the reform project is to agree on how exactly the pre-tax profit will be determined. Within the EU, a plan for uniform rules for determining taxable profits failed a few years ago. As an alternative, resorting to internationally harmonized financial reporting regulations does not do justice to special tax considerations. Many countries also use targeted tax incentives to promote research and development and investments in green technologies. These can lower the tax burden and the national tax rate below the specified tax level and trigger subsequent taxation. Incentives to make investments worthy of support are ineffective.
The success of the minimum tax depends on whether a global consensus can be reached. As soon as individual states refrain from the minimum tax level or compensate the increased tax expense with new, non-tax subsidies, it becomes worthwhile for large corporations to think about relocating their corporate headquarters to these states. The much-criticized tax competition between states will not be stopped by this reform either, but only slowed down at a level of 15 percent.
Both parts of the reform package are to be implemented together. Only through international cooperation can the taxation system keep pace with the economic developments of globalization and digitization. Going it alone nationally, such as the digital taxes implemented in the UK and France, add complexity to the tax system and can have a negative impact on investments. After all: The EU Commission has put plans to introduce a special charge for digital activities on hold for the time being. It not only spares US digital corporations from double taxation, but also does not stand in the way of the digital transformation of the business models of European corporations. German automobile manufacturers and mechanical engineering companies are also increasingly marketing digital services without being digital corporations per se.