Common questions
Today, the Bundestag approved a law introducing a global minimum tax for companies operating internationally. What consequences does this have – for companies and the State?
The Bundestag today agreed to a global minimum tax for large international companies. Factions of the government 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. This is “one of the biggest reforms in international corporate taxation”, writes the Federal Ministry of Finance on its website. What will this change – and what does it mean for state revenues?
What rules currently exist?
Currently, the taxation of multinational business groups is still largely organized at national level. In other words: a company only has to pay taxes on its profits in the states where it has a physical presence. Tax rates can be extremely different – even within Europe. While in so-called tax havens, such as Hungary or Ireland, it is nine and 12.5 percent, according to the Organization for Economic Co-operation and Development (OECD), Germany charges just under 30 percent tax on societies.
Why is such minimal taxation necessary?
It is common practice for many companies to move money between subsidiaries in different countries so 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 payments for licenses to use trademarks or patents. Increasing digitalization also plays a role. Nowadays it is often possible to be economically active in countries without having a physical presence there, to which income taxation is linked.
Many states with average or higher corporate taxes are losing significant revenue as a result of these strategies. According to the federal government, the new global minimum tax is intended to help neutralize this “harmful tax competition and aggressive tax planning” and promote tax fairness 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: first, where the tax is levied and, second, what its amount is. The first pillar According to the federal government, this includes a new system of attributing tax rights to the tax jurisdictions in which the respective companies generate their profits. The OECD is currently still working on this concept.
The second pillar concerns the mentioned minimum corporate tax rate. Internationally active companies with an annual turnover of more than 750 million euros will in future pay at least 15% tax 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 parent company’s home country has the right to claim the difference and tax the tax haven’s profits at six percent. This is intended to ensure that all companies “make their fair contribution to community financing”, according to the Ministry of Finance.
What preceded the reform?
As early as April 2021, US Secretary of the Economy 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, G20 countries reached agreement on the 15 percent minimum tax proposed by the OECD, which a total of 138 countries agreed to as of October 2021. After months of negotiations and a temporary blockade by Hungary, European Union (EU) states finally agreed to a uniform implementation late last year. The second pillar of the reform was then legally anchored in the EU and must be converted into national legislation 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. Regarding the distribution of tax rights, the details of which are still being worked out, the mercantile states are expected to receive more than 125 billion dollars annually. The EU Tax Observatory predicts almost €50 billion in additional tax revenue for the European Union.
“We estimate that another 200 billion euros will flow into the coffers of the international community,” he said. Achim Pross, who was invited as an OECD representative to a Finance Committee meeting in mid-October. Germany is also responsible for a notable part 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 on the additional revenue, but has commissioned the ifo Institute in Munich to do so. The result of the brief expert report published in June: Germany will be a big winner of the reform.
In the period from 2024 to 2026, the State can expect additional tax revenues from the first pillar on an average of around €850 million to €1.7 billion per year. This depends on whether the share received is taxed at 15% or 30%.
The second pillar will also lead to an increase in tax revenues, researchers continued. If the introduction of minimum taxation actually leads to a decline in profit shifting for tax reasons, expect additional tax revenues of around €1.5 to €1.7 billion annually between 2024 and 2026.
What do the experts say?
Experts consider the introduction of a global minimum tax a “game changer” in the fight against decades of tax dumping by large companies. But there are also criticisms: the Institute of Auditors at the Finance Commission spoke of “one of the most complicated regulations” and called for simplifications. Additionally, some believe that 15% is not enough. The minimum tax rate is too low, said left-wing politician Christian Görke. He described the bill as “troubling” and a “financial number zero.”
Whether and to what extent Germany can generate any income from minimum taxation depends on how low-tax countries react to the decision, the ifo Institute writes in its report. They would have the opportunity to guarantee revenues from additional taxation of the profits of companies based in their country, charging a “qualified national supplementary tax”. It should also be taken into account that companies may try to escape the scope of application.
Furthermore, according to experts, the tax gap between countries is likely to remain in principle – and tax havens will therefore continue to exist. Because: Above 15 percent, competition may continue in the future.