Berlin, Brussels The conditions for the big appearance of Olaf Scholz (SPD) are not ideal. His first trip abroad after the federal election took the presumably future Chancellor to Washington. Scholz meets with colleagues from the G20 countries on the sidelines of the autumn meeting of the International Monetary Fund (IMF).
Like all ministers visiting the US, he wants to use the backdrop of the White House for a few television recordings. Environmental activists demonstrate in the background, snipers stand with their legs apart on the gables of the government headquarters.
Tourists walk through the picture, and the jackhammer on a construction site distracts even more from what Scholz is actually here for: The finance minister and future chancellor wants to pay tribute to his greatest negotiating success, the global minimum tax.
Scholz praises the “revolutionary reform” that 136 states have joined. “We are assuming that Germany will also benefit greatly from this new regulation and that it will be billions,” said Scholz. He sees the global tax reform as one of his greatest political successes.
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That’s why it’s not the first time he’s boasted about it. In the past six months, Scholz has already announced so many breakthroughs from somewhere in the world that you could hardly keep up with the count.
Specifically, the agreement looks like this: One element is a global minimum tax for companies of 15 percent. This minimum tax is Scholz’s baby, he put it on the G20 agenda and successfully implemented the idea, albeit with great help from the new US government, whose rethinking made the compromise possible at the beginning of the year. It is expected that this will increase global tax revenues by $ 150 billion.
The second element reforms the taxation of highly profitable large corporations. Originally a digital tax was planned that would primarily target Apple, Google or Facebook. But the USA resisted, which is why companies from other industries are now also subject to the new tax rules.
Companies that turn over more than $ 20 billion a year and have a profit margin of at least ten percent are affected by the new regulation. Raw materials and financial groups are excluded.
In contrast to the minimum tax, it does not generate new tax revenues, but rather distributes existing revenues differently between the states. So far, companies have mainly paid taxes in the country where they have their corporate headquarters.
From 2023 on, corporations are expected to pay more taxes where they sell their products and make their profits. It is estimated that this will result in a tax redistribution of $ 125 billion.
Tricky negotiations
The negotiations on the reallocation of these “taxation rights” have recently turned out to be even more tricky than the negotiations on the minimum tax rate. It was debated how much of the profit should be redistributed among the countries.
In the end, it was agreed to grant the market countries tax rights of 25 percent of a company profit that exceeds the profitability threshold of ten percent. Sounds complicated and it is. Another board the negotiators had to drill was the elimination of national digital taxes such as those in France.
The agreement has always been: If there is an agreement on a global digital tax, all national digital taxes will be abolished. However, some governments resisted this, and in the end they were convinced.
Also from Scholz, as it is called from negotiating circles. He had repeatedly interrupted the election campaign and explorations in order to deal with ministerial colleagues from other countries, giving in on one point or another.
The global minimum tax is a success of the cooperation between the finance ministers from Germany and France.
(Photo: Bloomberg)
Initially, 100 to 120 multinational corporations worldwide will fall under the new rules. Numbers and names are circulating, but some of them contradict each other. Negotiators also point out that adjustments to the tax bases could result in postponements and that the reform will not come into force for two years.
German business fears a hanging party
From the point of view of the German economy, this is problematic, it fears that it will be stuck. The agreement on a global minimum tax was “a major milestone” for equal framework conditions in the world tax system, said the chief executive of the Federal Association of German Business (BDI), Joachim Lang. Now, however, planning security is needed quickly, “for example on the basis of assessment and definition of taxable profit”.
What is certain is that the list of companies affected will primarily include pharmaceutical manufacturers, large brand suppliers and tech companies. Germany is only marginally affected. “It is to be expected that the number of companies will be in the single-digit range,” BDI tax expert Monika Wünnemann recently told Handelsblatt. A figure that is considered realistic even in negotiating circles.
A look at the balance sheets of Europe’s top companies shows who the criteria apply to and who doesn’t. The software providers SAP and Adidas or, from France, the luxury goods provider LVMH are considered to be set. The German car companies, on the other hand, are too low-margin.
The most profitable companies in the world are US corporations, so they will be represented accordingly on the list. Even if the tax regime is no longer purely digital tax, the result is similar: companies like Google, Apple and Facebook are likely to pay more taxes in the future in countries where they generate sales and less at the US headquarters.
The US Treasury Secretary said she was confident that the government would manage to push the tax reform through Congress.
(Photo: Reuters)
This begs the question of how the reform will affect US tax revenue. The opposition in Washington has already announced resistance because they fear losses. US Treasury Secretary Janet Yellen is confident that the government will succeed in pushing the tax reform through Congress. But that’s not yet settled. The global tax pact would not be the first international agreement to fail in Congress.
The EU Commission is struggling with less resistance. The authority wants to present the guideline for the minimum tax as early as February 2022. The redistribution of taxation rights is to be regulated in a separate directive that the Commission has undertaken for the fourth quarter of 2022.
But first of all, the reform is to be officially adopted by the heads of state at the G20 summit at the end of October. An occasion on which Scholz will certainly not miss the opportunity to announce another “breakthrough”.
More: Additional income of 150 billion euros per year – this is what the global tax reform will bring