Global Minimum Tax – a Major Tax Revolution?
The G7 countries have agreed on a global minimum tax for companies of 15 percent. At first, that sounds reasonable and fair. In fact, it’s shameless for American high-tech corporations to feast on big sales and profits in Europe and Asia, but skip the bill when it comes to taxation. When it comes to taxation, details are important. Indeed, what initially sounds fair in terms of taxation is not so fair on closer scrutiny.
Drying up tax havens is basically a good thing
Many companies sneak past the tax authorities like young people sneak past the bouncer in front of a disco. This is especially the case for U.S. digital corporations such as Alphabet, Amazon, Apple and Facebook, which are guided by the “maximin principle.” They make huge sales and profits in numerous countries and have no inhibitions about using their infrastructure for their business success. But they make quite a slim foothold for tax purposes by optimizing company headquarters.
In 2020, Amazon even managed to report a loss in Europe despite record sales. This means that countries with high corporate taxes in particular, such as germany or other north-west european countries, are missing out on considerable government revenue that would also benefit a functioning community.
This is why it seems so self-evident that corporate tax liability is no longer linked to the company’s registered office, as was previously the case, but to the respective place of turnover with a minimum tax of 15 percent.
Politicians involved in the EU are therefore stressing that europe is one of the biggest winners of global minimum taxation. When the big American high-tech corporations finally settled their tax bills, a deluge of government revenue would be coming their way. Ideally, even the debate about post-coronal tax increases could become superfluous. Last but not least, the small firm sector with its many jobs would gain in competitive strength through the abolition of the large corporations’ tax domicile privilege.
Tax me if you can
But what does this beautiful tax vision look like in practice? What degree of tax fairness can be achieved at all?
First of all, in view of the trillions and trillions spent on post-Corona reconstruction, climate protection and remedying Europe’s competitive shortcomings, even the estimated additional revenue of 100 billion euros for the EU is just a drop in the bucket.
But can even this sum be achieved at all? This would require a global esprit de corps: Not only the G7, but also the major emerging economies would have to join in to drain tax swamps sustainably. The G20 summit in Venice next July will provide an opportunity to do just that. But countries such as China, India and Turkey will be reluctant to accept “Western” tax rates that impair their locational qualities.
Countries like Ireland, the Netherlands or Luxembourg want to maintain their competitiveness with low taxes. The Irish would even completely forgo tax revenues from Apple & Co. as long as these digital corporations create jobs on the Emerald Isle.
And even if an agreement could be reached, you have to look very closely at the tax changes away from the headlines. You have to get down to the fiscal nitty-gritty. For example, only corporations with a profit margin of more than ten percent are to be taxed “also” where they make their sales. If the margin is higher, 20 percent of the profits will be taxed in the countries where the sales are made.
This will largely turn digital groups into milking cows. Okay, those who have, those who earn well, should also give. But it is obviously not planned that all profits in a country will be subject to minimum taxation, but rather a maximum of 20 percent. The ratio of company taxation to sales tax would then still be four to one.
Big Tax vs. Small Tax
The European low-tax countries can live very well with this. Ireland’s tax residence privilege with a current corporate tax rate of 12.5 percent is not endangered when just one fifth of profits are subject to a 2.5 percentage point increase in taxation. Ireland’s locational advantage is still impressive in view of a German corporate tax rate of 30 percent.
And so the IT groups’ tax happy hour is not really clouded either. In fact, Facebook has already expressed its approval of the minimum tax, which would still be a fantastically low tax rate to begin with. At the same time, IT groups would escape the muckraking corner of “tax dodgers,” which would certainly help the company’s image. Incidentally, Amazon’s profit margin in the fantastic 2020 financial year was “only” 6.3 percent. So nothing will change for them with the introduction of the minimum tax rate. This will also hardly impress the stock prices of the digital corporations.
Above all, however, the American IT companies are delighted that the U.S. government considers the introduction of the minimum tax rate to be the final straw in the tax dispute between their digital companies in Europe. The issue of an across-the-board digital tax in Europe would then be off the table and Facebook & Co. would be off the hook, tax-wise. Does the EU really want to risk a new trade war with U.S. tariffs on Europe’s export industry while the transatlantic relationship has thawed somewhat and Washington is even “tolerating” the natural gas pipeline through the Baltic Sea? Politics is always the art of possible.
President Biden can even relax his “left-wing” Democrats, who regard Apple & Co. as the wild spawn of an unrestrained turbo-capitalist hell, with the supposed minimum taxation of his IT corporations in America.
Speaking of politics, the European “minimum tax hurrah yellers” leave out a significant tax aspect. If nothing else, it’s about what the tax rate is based on. It’s about the tax base. After all, every low-tax country has an unrestricted sovereign fiscal right. It is easy, for example, to use special depreciation allowances to compensate, if not overcompensate, for any minimum tax increase.
In addition, one should not disregard the various legal options for creative accounting. Every digital company can afford the best tax consultants, the smartest accounting professionals, who sniff out loopholes like bloodhounds sniff out a hot trail.
All in all, I don’t see how the previous almost Olympian tax-cutting competition is supposed to move in the direction of a tax revolution, a real tax justice, via a minimum tax. I can hear the fair-tax words of the politicians, but I lack faith.
There is even a danger that the minimum tax rate of 15 percent will become the new standard for corporate taxation. Then, despite possible taxes from Amazon and others, Europe would collect less taxes on Net, not more. Minimum taxation could become a Trojan horse.
Instead of chasing the illusion of a miraculous increase in taxes without any effort on our part, we must finally get our own business location up to speed with courageous reforms: Reducing bureaucracy, improving infrastructure and digitization, relinquishing the title of European champion in electricity costs, education, climate protection with free-market and not ideological or even neo-socialist means are what is needed. This is also the way to achieve more economic growth, which in turn ensures higher tax revenues.
Switzerland is also a high-tax country. And yet its overall competitiveness is so attractive that companies are happy to invest in Helvetia.