Digital technology plays an integral role in boosting economic advancement and growth. It facilitates the globalisation of economic activity and business structures. Digitalisation affects nearly every aspect of our lives, including communication, production and consumption.
It has become nearly impossible to draw clear boundaries between the traditional economy and the digital economy. This means we need rules that work for all business models, regardless of how digital they are. This is especially true for the tax rules we use to ensure that large companies pay their fair share of taxes needed to finance government functions.
The increasing digitalisation of the economy, and the altered processes of value creation this brings, pose without a doubt one of the greatest challenges to international principles of taxation: Intangible assets and cross-border services enable companies to do business in countries where they have no physical presence and thus to earn profits that – under current tax rules – are not taxable in those countries.
Digitalisation also makes it easier to engage in aggressive tax planning, for example by shifting profits from high-tax jurisdictions to low-tax jurisdictions. This not only undermines acceptance of applicable rules but also encourages a “race to the bottom” in which jurisdictions try to outbid each other with lower and lower tax rates.
For this reason, at the behest of the G20, the OECD developed a two-pillar strategy to solve the tax challenges posed by the digitalised economy. 139 jurisdictions are working on this crucial project.
Under the first pillar, participating jurisdictions have developed a blueprint for reallocating international taxing rights. Through the creation of new nexus rules, some taxing rights will be reallocated from the site of production to where the products are sold (known as “market jurisdictions”). To this end, a share of the profits earned by a corporate group or business line will be allocated to market jurisdictions based on a formula, regardless of whether or not the company has a physical presence there.
Any analysis of Pillar 1 must keep in mind the pillar’s overriding objective: the stability of the international system of tax law. If the international community fails to adopt a sustainable solution for Pillar 1, individual countries are poised to levy their own digital taxes. This would lead to legal uncertainty for all affected parties. For this reason, Germany is deeply committed to building a consensus in this area.
Pillar 2 consists of a proposal to establish a global minimum effective tax. This proposal was introduced jointly by German Finance Minister Olaf Scholz and his French counterpart Bruno Le Maire.
The basic principle behind a global minimum effective tax is relatively simple: all countries agree on a minimum level of tax that applies worldwide. However, no country is told what tax rate it has to charge. At the same time, countries with higher tax rates will be given the possibility to react to countries with much lower tax rates (for example, by charging tax on profits shifted abroad or by denying deductions of business expenses). The amount of tax will be based on the difference between the actual tax due in the other country and the agreed minimum tax rate. Overall, this approach will lead to greater tax fairness at the international level. In addition, a global minimum effective tax will effectively counteract the tax problems caused by digitalisation and by possibilities for transferring intangibles.
Our FAQs on the global minimum tax provide detailed information on both pillars.
G20 finance ministers and G20 heads of state and government have repeatedly emphasised the need to reach an international agreement in response to the tax challenges posed by the digitalised economy. They committed themselves to concluding this work by mid-2021.
“The agreement to establish a global minimum tax is a monumental step towards greater tax fairness. We negotiated intensely to achieve this positive outcome for Germany. This is very good news for all taxpayers. We have fulfilled the promise we made to our citizens: In the future, major corporations will pay their fair share to help finance public goods. We will now push hard to ensure that these results are swiftly put into practice in Europe.” Finance Minister Olaf Scholz
At the European level as well, EU member states welcome the significant progress that has been achieved at the international level. They too have reaffirmed their commitment to ensure that an internationally agreed solution is reached by mid-2021 at the latest. This commitment was stated explicitly in the Council conclusions adopted during Germany’s Council Presidency in 2020.
The international agreement on the two-pillar plan that was reached on 1 July 2021, and the approval of this outcome by G20 finance ministers at their most recent meeting in Venice on 9–10 July 2021, represent a major step forward towards greater tax fairness. The agreed rules are to be implemented in a timely manner. Pillar 1 is expected to be implemented on the basis of an international treaty, which will then need to be ratified by participating countries and enacted into national law. In the case of Pillar 2, the participating countries will formulate recommendations for implementation. In addition to this implementation plan developed by the international community, the European Commission also intends to monitor the process closely in order to ensure prompt and uniform implementation within the European Union.