G20 meeting of finance ministers and central bank governors in Fukuoka
Multinational corporations, especially those operating in the digital economy, need to be taxed appropriately. At their recent meeting in Japan, the finance ministers of the leading advanced and emerging economies achieved an important milestone towards this goal by agreeing to adopt a global minimum tax next year. This was originally a Franco-German proposal that was put forward by German Finance Minister Olaf Scholz and his French counterpart Bruno Le Maire last year.
The idea behind a global minimum level of taxation is to prevent certain multinational corporations from using complex international corporate structures as a way of avoiding taxes. Such tax avoidance practices are aided by digital technologies and are actively supported by some countries. Companies that engage in such practices do not contribute to financing public services from which they themselves benefit. Moreover, this kind of behaviour distorts competition in a way that is harmful to honest businesses. Coordinated international action is therefore needed. Countries are taking firm and resolute steps to prevent such behaviour on the part of multinational corporations in a range of different sectors (including online retailers, search engines, coffeehouse chains and furniture giants).
Since taking office in March 2018, Finance Minister Olaf Scholz has spoken out in various international bodies, urging the international community to take more effective action against tax fraud and tax avoidance. Last year, he and his French counterpart Bruno Le Maire developed a proposal for a global minimum effective tax and presented it to other finance ministers.
The basic principle is simple: All countries will agree on a global minimum level of taxation. This does not mean that countries will be told how much to tax their businesses. Rather, it will give countries with higher tax rates the option of responding to very low tax rates in other countries. Countries will have the right to tax profits generated on their territory at a rate equivalent to the difference between the tax paid and the agreed minimum tax. This will enhance international tax equity.
The following typical examples show how this will work:
Example 1: A German corporation has a subsidiary in a Caribbean country, where the subsidiary’s profits are taxed at a rate that is six percentage points below the agreed global minimum level of taxation.
Example 2: A foreign corporation has a subsidiary in a German city. This subsidiary reduces its German tax bill significantly by diverting most of its taxable profits as royalties to another subsidiary of the same parent company that is located in a country where royalties are taxed at a particularly low rate.
Under the proposed minimum tax model, German tax authorities would be able to respond appropriately to both of these typical tax minimisation strategies. In the case of Example 1, they could levy the missing 6 percentage points of tax on the shifted profits. In the case of Example 2, they could refuse to allow the deduction of royalty payments as business expenses.
International negotiations on the Franco-German proposal are now in full swing. The G20 has tasked the OECD with producing a concrete proposal by 2020. In total, 129 countries are involved, including many emerging and developing economies. The relevant working group is chaired by a representative of the German Finance Ministry.
At their recent meeting in Japan, the G20 finance ministers adopted an ambitious roadmap that broadly outlines the contents and timeline of the project. The participating countries plan to agree on the cornerstones of a minimum effective tax by early 2020. Various OECD expert bodies will be involved in this process. As is so often the case in the area of tax law, the questions that need to be addressed are highly complex, but they can be resolved. The plan is for the proposal to be adopted in 2020. Finance Minister Scholz successfully campaigned for this clear position at the G20 meeting in Japan.
The timeline is ambitious but achievable. In its initiative to combat base erosion and profit shifting (BEPS), the G20 has already shown that strong political backing and international pressure can produce great results, even in the face of divergent interests. And with a clear mandate from the world’s 20 leading economies, it will be possible to convince smaller states that currently benefit from unfair tax competition of the need for joint action.
The initiative for global minimum effective tax fits in with existing rules that have already accomplished a great deal at the national, international and European level. For example, the G20 has agreed on new international rules that will make it more difficult for corporations to take advantage of differences in tax laws. In addition, an exchange of information regarding corporations’ tax payments has been established. A number of other important projects will be launched soon. Within the EU, Germany and France have developed a joint approach for a common corporate tax base. The aim here is to create equal conditions for the taxation of companies across Europe. Germany and France have also managed to make significant progress on the long-stalled project to introduce a financial transaction tax. In Germany, stricter rules against VAT fraud in online retail came into effect this year. In addition, Germany will adopt new rules before the end of the year that will require companies to disclose tax avoidance schemes to the authorities. The idea is to enable the state to respond more quickly to and take effective action against undesirable practices.
Germany wants to harness this momentum for its EU presidency in the second half of 2020. The agreement reached at the OECD and G20 level needs to be developed into a binding EU-wide standard as quickly as possible. The member states are expected to agree on EU-wide implementation in the second half of 2020. The meeting in Japan was a major milestone towards fair corporate taxation in Europe and across the world.