- International corporate taxation is a pretty abstract topic. What exactly is being changed?
- Where do things currently stand with the minimum tax?
- What is the current status of the implementation in Germany?
- Why is a global minimum tax rate a question of fairness?
- What will the minimum tax rate be?
- Which companies are affected by the minimum taxation rules?
- What will be done to ensure the minimum tax is actually paid?
- What do the new rules mean for Germany in terms of revenue?
International corporate taxation is a pretty abstract topic. What exactly is being changed?
The recent agreements reached by the international community constitute one of the biggest-ever reforms to international corporate tax rules. The reform blueprint encompasses two “pillars”.
Pillar 1 will ensure greater fairness in the allocation of taxing rights and tax revenue among the world’s countries. Such rules are particularly important for the taxation of large tech companies – for example, companies that can reap extremely high profits from internet sales or ad clicks even in countries where they have no factories or branches. Under the current rules, taxes are payable primarily in the countries where firms have a physical presence. We need new rules that adequately reflect the increasing digitalisation of the economy. Companies should also pay taxes in the countries where they generate profits. Intensive work on the implementation of the first pillar is continuing at the international level.
In addition, the new approach will ensure all companies make a fair contribution to financing public goods. To this end, Germany and France presented a joint proposal for a global minimum effective tax rate in October 2018. This global minimum effective tax rate is the second pillar of the agreed reform. Its aim is to introduce a minimum level of tax, in order to increase the size of the pie for all countries and put a stop to aggressive tax planning. This also increases the competitiveness of companies that do not use tax planning strategies.
Where do things currently stand with the minimum tax?
On 1 July 2021, a broad-based international agreement on the key elements of the reform was reached by the members of the OECD’s Inclusive Framework on Base Erosion and Profit Shifting (BEPS), the body which has been working on this issue under the auspices of the OECD.
This approach was approved by the finance ministers of the 20 leading advanced and emerging economies – the G20 – at their meeting in Venice on 9–10 July 2021. However, some technical details remained unresolved. These were successfully clarified at another meeting of the Inclusive Framework on BEPS on 8 October 2021. In addition, the participating countries agreed on a roadmap to implement the approved measures.
A total of 138 members of the Inclusive Framework on BEPS have joined the international agreement. The outcomes were approved at the meeting of G20 finance ministers in Washington, D.C., on 13 October 2021.
Regarding the minimum tax rate under Pillar 2, on 20 December 2021 the OECD Secretariat published internationally agreed model rules designed to act as a blueprint for the implementation of a global minimum effective tax rate in national law. A model commentary to aid in interpreting the rules was published on 14 March 2022, supplementing the model rules.
On 15 December 2022, the European Union member states agreed on a common directive to ensure uniform implementation within the EU. The directive must be transposed into national law by 31 December 2023.
What is the current status of the implementation in Germany?
On 16 August 2023, the federal cabinet adopted the government draft (in German) of an Act Implementing Council Directive (EU) 2022/2523 on Ensuring a Global Minimum Level of Taxation and Other Accompanying Measures (Gesetz zur Umsetzung der Richtlinie (EU) 2022/2523 des Rates zur Gewährleistung einer globalen Mindestbesteuerung und weiterer Begleitmaßnahmen).
The Finance Ministry published an initial discussion draft of the Act on 20 March 2023 to give industry stakeholders the opportunity to comment on the proposal as early as possible, before the official legislative procedure.
After incorporating the comprehensive feedback that was received, the Finance Ministry presented a ministry draft on 10 July 2023. This formed the basis of the subsequent government draft, with which the ordinary legislative procedure was initiated.
Why is a global minimum tax rate a question of fairness?
When large multinational corporations end up paying very little tax because they can shift their profits to tax havens, this is extremely unfair. First, because this takes away money that is needed to pay for public goods such as schools, childcare facilities, hospitals, pensions, transport networks and well-kept streets. Second, it is not fair if German companies pay an appropriate amount of tax while highly profitable international corporations use tricks to save billions in taxes. This will now be stopped.
What will the minimum tax rate be?
The minimum tax rate will be 15%.
Which companies are affected by the minimum taxation rules?
In accordance with the EU directive, the minimum taxation rules will apply to all international companies and large-scale domestic groups with turnover above €750 million. In future, multinational firms will have to pay a tax rate of 15% on all of the profits they make worldwide, regardless of where the profits are generated. Under current rules, subsidiaries located in tax havens pay very little in tax, which of course benefits the corporation as a whole. This will no longer be possible in future.
What will be done to ensure the minimum tax is actually paid?
If, for example, profits earned by a group subsidiary located in a tax haven are taxed at an effective rate of only 5%, then the new rules will come into play.
With a global minimum tax rate of 15%, the country where the parent company is based will have the right to charge an additional 10% in taxes on the subsidiary’s profits. This will ensure that even those profits located in the tax haven are ultimately subject to an effective tax rate of 15%.
Furthermore, the new rules will prevent corporations from using tricks to shift profits to tax havens. One of these tricks is the payment of royalties to related group companies located in tax havens. Royalties include things like payments for the use of brand names, patents and other rights.
Continuing with the above example, let’s say that some of the group’s rights are held by a subsidiary located in a tax haven. The subsidiary then receives regular royalty payments from other group companies located in countries with high tax rates. This allows the companies in high-tax countries to reduce their profits, because they can deduct the royalties as business expenses.
Tricks like this will no longer be possible in the future. Here, too, effective taxation at the global minimum rate will be ensured by means of a top-up tax.
What do the new rules mean for Germany in terms of revenue?
Based on current calculations, Germany’s tax revenue will increase as a result of the minimum tax rate.