- Date 08 May 2019
[Original: German. Check against delivery.]
Ladies and gentlemen,
I’m happy to have the opportunity to speak to you here at today’s international tax symposium. This is something that I’m really pleased to do, because the topic that is the focus of this event is not only interesting from a technical point of view, but is also one of the key policy questions of our time.
In the week after next, elections will be held that will put a new European Parliament in place. If you speak with citizens, one of their greatest concerns is to ensure that international companies pay their fair share in taxes. Surveys confirm this.
Taxation touches the very core of democracy as well as our understanding of justice. So it’s not surprising that, every time globalisation shows its negative side, questions about taxation come up too. Over the past decade, as we undertook efforts to combat the global financial crisis, the idea of adopting a financial transaction tax – something that hadn’t been taken seriously before – gained increasing acceptance. Today we can say that, working together with France, we have taken major forward strides.
Today it’s mainly the world’s big tech companies – especially Google, Apple, Facebook and Amazon, which are sometimes referred to as “GAFA” – that are generating a sense of unease with their market power, and with their sometimes unfair tax practices. This is why we have recently seen increasing demands for a specific “digital tax”. Whatever you might think about proposals like this, one thing is certain: We need a new international campaign to push for the fair taxation of companies.
The present climate provides us with a good opportunity to do this.
Today many governments on the world stage are thinking about the need to restructure international tax law. We are in the process of making an “upgrade” to tax law in light of the changes that are being triggered by globalisation and digitalisation. Basically, this involves three main objectives:
- First, we have the fight against tax avoidance and tax dumping, which is essentially a question of ensuring fair taxation. This is something that is crucial for small and medium-sized businesses, in particular.
- Second, we are talking about the allocation of taxing rights at the global level.
- Third, we want to ensure that states take in sufficient and reliable tax revenues, which they need in order to provide public goods and to shape policy proactively.
These are questions of great technical difficulty. And of course, they are something dealt with primarily by experts. But this is so much more than a discussion “only” about the technicalities of taxation. Rather, the decisions that need to be made are also political – and these decisions are constantly being made anew. On the one hand, we have companies that look for loopholes in order to minimise – or, as some people say, optimise – their tax burden, sometimes to the very limits of what is legal. And we have states that offer such loopholes.
On the other hand, we have governments and legislative bodies that have to ensure fair taxation, and have to ensure that this is implemented effectively. But doing this exclusively at the level of the nation-state is hardly possible anymore, because so many companies do business across borders and often at the global level. This means that they can shift profits and losses, sometimes even with the assistance of states – for example through tax havens and tax rulings.
What we are talking about here today concerns the distribution of tax revenue. Or to put it in simpler terms: how we cut up the tax pie. But not just that – it also concerns the economic welfare of states, the financing of public goods, and the basic conditions of democracy. And these things are in everyone’s interest.
We need clearly defined international rules to ensure that taxes are levied at the right place, and to avoid double taxation. That’s the first major topic at our symposium today. In addition, we need clear rules to prevent tax evasion, double non-taxation and the failure to tax at all.
The allocation of taxing rights is something like a global struggle for a bigger slice of the pie.
We conduct this struggle in a very civil manner, with sound concepts and solid arguments, and with an appreciation for the situation that other countries find themselves in and for the machinations of the global economy.
So I’m very glad that we will have the opportunity today to conduct nuanced discussions with distinguished experts.
When companies or individuals avoid taxes, people get angry. This anger transcends the borders of individual countries, and it is not limited to private citizens. Rather, tax avoidance harms the economy and distorts competition. Tax avoidance is a major issue all around the world.
Billions of euros in tax revenue are lost as a result of profit shifting and tax planning schemes. This is even worse for countries with low levels of tax revenue than it is for countries that are well off.
When we talk about a “double Irish” with a “Dutch sandwich” or a “Swiss sandwich”, we’re not talking about haute cuisine. As everyone here knows, these are highly aggressive forms of tax planning that the OECD classifies as “harmful”. Especially in cases where business activity is focused mainly on virtual marketplaces or on intangible assets such as licences or trademarks, profits and losses can easily be shifted for purposes of tax optimisation.
The spread of digital technology facilitates tax avoidance, and tax avoidance is practised by big tech firms and by other companies as well. In 2017, the G20 tasked the OECD with developing a standard for the appropriate taxation of tech companies.
But this problem goes far beyond companies that are purely digital in nature. Today, digital technology affects nearly every part of our lives, including communication, production and consumption. It is now almost impossible to separate the digital economy from the conventional economy. This means we need rules that work for all business models, whether analogue or digital. And that give tax authorities sufficient information rights and powers of oversight.
This brings us to a fundamental problem: The current system of international taxation is geared towards traditional industry that consists of factories and business premises. These are permanent establishments with locations that are easy to identify. The basic contours of today’s international tax law were finalised nearly 100 years ago by a committee at the League of Nations. Back then, the central question was “source” or “residence”. The committee was comprised of 13 experts. These included Herbert Dorn, a high-level official at the Reich Finance Ministry in Germany, who coined the concept of “permanent establishment”: under this concept, taxing rights are allocated on the basis of where a company’s premises, equipment and staff are located.
But things have changed. Today, many commercial activities take place in the cloud or on websites, often with the assistance of algorithms. This means that the traditional components used by source countries to assess and collect taxes are often missing.
At the same time, data and user behaviour are playing an increasingly important role in the process of value creation. This is another factor that is nearly impossible to capture under current tax rules. This is why countries where users and markets are located are demanding bigger pieces of the pie. A number of proposals have been put on the table. Discussions about the international allocation of taxing rights are in full swing.
Thus, at the OECD, we are dealing with two key issues: First is the blatantly low rate of taxes paid by global companies, especially companies that belong to the digital economy. This is a matter that everyone pretty much agrees on: Multinational corporations need to pay an appropriate amount of taxes. In other words, we need to make the pie bigger.
Second, we are grappling with the reallocation of taxing rights and calling the current system into question – and we’re doing this at the global level. On this second issue, different countries have very different interests.
Solutions are being negotiated within the OECD and the G20. Today, the Inclusive Framework on Base Erosion and Profit Shifting encompasses many more countries and jurisdictions than in Herbert Dorn’s time, when earlier provisions of international tax law were being developed. Decisions today require building a consensus among 129 members that are part of an international system with highly diverse interests.
We are talking about a re-mapping of the global tax system. A lot of money is involved: In just the 36 countries that belong to the OECD, companies currently pay a total of $1.2 trillion in taxes.
Current international discussions focus on two approaches: First, proposals have been made to strengthen the position of market countries (pillar 1). Second, Germany and France have submitted a proposal for a minimum effective tax (pillar 2).
Pillar 1 aims to change nexus rules in a way that realigns the nexus away from the jurisdiction where the permanent establishment is located and more towards the jurisdiction where the products are marketed. Most proposals reflect the interests of the countries that submit them.
For example, the United States emphasises the importance of trademarks, business relationships and customer data. Under its “Marketing Intangibles Approach”, profits are allocated on the basis of a company’s marketing efforts. This would probably lead to a new, separate taxing right.
In contrast, a proposal by the UK takes greater account of users’ contributions to a company’s success. With the “User Contribution Approach”, the main factor is therefore the size of the market.
Emerging economies have proposed introducing the concept of a digital permanent establishment for cases where there is a significant digital presence. In addition, there are also other plans for digital taxes with a national focus.
However, we need to give careful consideration to two things when we are evaluating these proposals:
First, purely national solutions always also have international ramifications. This is because every time a country supports a particular approach at on the national level, it is simultaneously taking a position in the global struggle for a bigger piece of the pie. We therefore need to examine what it would mean for us if a rule conceived at the national level were to become a general taxation principle. And we need to ask: When we take all the ramifications into account, is the proposal as good an idea as it appeared at first glance?
Second, we need to calculate precisely what would happen if taxing rights were increasingly allocated to the market country. It’s clear that exporting countries would be the main losers in this scenario.
For example, Copenhagen Economics has calculated that, if the system was transformed in this way, 17 percent of business taxation in Germany could be lost. This is an estimate that is based only on rough assumptions. But we always keep an eye on this and similar calculations regarding the macroeconomic effects.
It’s like with Kant’s categorical imperative. The proposals must be evaluated on the basis of a “tax policy imperative”: Is it in Germany’s interest for a specific approach to become a general (i.e. global) rule? For an exporting country like Germany, a change to the system can end up being a bad deal, where citizens are ultimately the losers. That cannot be what Germany wants.
Therefore, here at the Federal Ministry of Finance, we have renewed our focus on analysing what is causing the race to the bottom in the area of tax competition. It’s true that there is not much point in trying to abolish tax competition as a whole, because taxes and budgets are the foundations of autonomous statehood. But a no-holds-barred tax competition with no downward limit poses a massive threat to state sovereignty. We must prevent this kind of race to the bottom in which some countries profit at the expense of others, without providing any public goods themselves.
For this reason, at the Finance Ministry we are working together with our French partners to develop a solution capable of gaining broad support. We don’t want to eliminate competition, but we want to create different incentives while at the same time strengthening fairness and justice. There is one proposal that achieves all of these things very nicely:
This is the Franco-German proposal for a minimum effective tax. I’d like to introduce this proposal in more detail now.
The basic principle of a global minimum effective tax – known as the second pillar – is simple: If, in the case of a foreign subsidiary, profits are taxed below a defined minimum, the parent company’s jurisdiction can claim the difference from that company.
There are binding standards to ensure that all revenue is taken into account. If all the profits of a foreign subsidiary are taxed to a sufficient minimum degree, then nothing changes for the company or the countries. But if the effective tax burden is below the agreed minimum, then the new regulatory framework would introduce a bottom limit to tax competition. This significantly reduces the incentive to endlessly cut effective tax rates and to shift profits to countries that engage in tax dumping.
In the debate on this issue, we often hear statements like: “That’s all well and good, but it will take a long time before governments and finance ministers reach an agreement at the international level.” But that is not quite accurate. After all, with the OECD BEPS programme, we have already achieved a lot in just a few years: We have tightened the rules against harmful tax competition. We are preventing double non-taxation with rules on hybrid legal entities and hybrid financial instruments. And we have developed recommendations for CFC rules and interest deduction rules. In Europe, we have already implemented these rules.
Our plan for a global minimum effective tax does not restructure the system. This distinguishes our plan from proposals to reallocate taxing rights.
A global minimum effective tax could be implemented very quickly, for the following reasons:
- First, it is not the case that some countries have to give something up so that others can benefit. None of the countries involved would be worse off afterwards. This is fair taxation.
- Second, this approach – which is being discussed within the OECD as the “Global anti-base erosion” proposal (GloBE) – is a consistent and logical advancement of the BEPS Actions, which 129 countries have already committed to. This is why we will talk about “BEPS 2.0” this afternoon.
A minimum tax would solve most of the tax problems that we have with the digital economy. It would apply to all business sectors, including global online retailers, coffeehouse chains, sportswear manufacturers and furniture companies.
There is now historic momentum for the important issue of developing a fair global tax standard: For the first time, there is the desire to adopt a common approach. We will take advantage of this momentum. Germany currently chairs the OECD’s Committee on Fiscal Affairs. We will also hold the EU Council presidency in the second half of 2020. This will give us an opportunity to make decisive progress on this issue.
The Franco-German proposal on a minimum effective tax is the most well-developed proposal within the OECD and currently has the most supporters. And we gained the United States as an important ally. This is because our proposal has direct connections to the US tax system. The new income category in the United States’ CFC rules – which is called “Global Intangible Low-Taxed Income” (known as GILTI) – is subject to a retrospective flat tax in the US (at a rate of 13 percent). The Netherlands is also on board: The joint German-Dutch declaration in March 2019, in which the two countries called for the recognition of the BEPS rules and for a plan for a minimum tax, met with great international interest.
The good thing is that we are not making this proposal to gain unilateral benefits. We are not trying to outdo other countries, and we are also not harming ourselves. The proposal will have positive effects on industrialised countries as well as on developing countries and emerging economies. The focus is on achieving fairness in international taxation. This is why IMF Managing Director Christine Lagarde supports the proposal, for example, as does the OECD Secretary-General.
The minimum tax does not replace the debate about the reorganisation of taxing rights. We can reach a consensus on adopting the minimum tax proposal while continuing discussions on other international tax law reforms. I would now like to take this opportunity to thank, in particular, Mr Perraud and Mr Kreienbaum and their teams for their excellent work. I am very confident and expect a milestone to be achieved in the coming year.
I would like to add one thing: In the unlikely event that a breakthrough does not occur at the OECD level, we Europeans are prepared: We have already agreed to take action within the EU in such an event. The fair taxation of companies will be one of the priorities for our Council presidency in the second half of 2020.
Ladies and gentlemen,
The changes caused by globalisation and the digital revolution pose challenges to our system of tax law. It is essential that policymakers actively shape these developments. We need fair international tax rules that safeguard funding for our public goods. Fairness has several dimensions: First, the rules must be fair from the perspective of the general public, because everyone needs to make an adequate contribution to the common good. Second, they must be fair from the perspective of companies. This means the same taxation obligations for everyone and fair competition (while avoiding double taxation). Third, they must be fair from the perspective of the international community, by means of a well-founded international allocation of taxing rights.
This discussion is not easy, and many details need to be addressed. It has ramifications for a key component of every country’s budget – namely tax revenue. That’s why the challenges are great. But we now have an opportunity to make clear progress, and we have a proposal for an immediate, very effective solution: We will create a new means of taxation that can be deployed in a flexible manner.
Germany needs your expertise, ladies and gentlemen. We must take joint action to achieve a fair global system that also puts Germany in a good position.
With this in mind, I would like to close by quoting Herbert Dorn, who once said: “Time is short for our peoples: Help each other, in order to help yourselves.”