Berlin When 141 countries agreed on a joint tax reform in October last year, then Finance Minister Olaf Scholz (SPD) praised the decision as a “milestone” in the fight for more tax justice. They wanted to tax digital corporations more heavily, redistribute tax revenue worldwide and introduce a global minimum tax rate for corporations.
But now it is clear that the global reform is likely to fail in significant parts. According to government representatives from EU countries and well-informed business representatives, the global digital tax threatens not to come about due to the lack of a majority in the USA. “There will be no majority for it in the US,” several insiders who wish to remain anonymous told Handelsblatt.
The situation is different with the global minimum tax. It should come, but possibly in a smaller circle than originally planned. In addition, the German economy is pushing for a shift. Wolfgang Niedermark, member of the executive board of the industry association BDI, told the Handelsblatt: “The BDI considers it necessary to postpone the start of the global minimum tax by one year to 2025.”
In particular, some DAX companies are sounding the alarm: In a letter to the Federal Finance Minister Christian Lindner (FDP), which is available to the Handelsblatt, 14 CFOs of German companies, including BASF, Bayer and Siemens, warn the federal government against “national solo efforts”.
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If half of the mammoth reform were to fail, it would have serious consequences. Instead of creating a new world tax order, old trade conflicts between the EU and the USA are threatening to break out again and the tax world is in danger of falling back into the old Wild West days without legal certainty, in which companies are threatened with double taxation.
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The global tax reform, led by the industrialized countries’ organization OECD, consists of two elements: One element is a global minimum tax for companies of 15 percent, which Scholz put on the agenda as finance minister. It is intended to put a stop to tax dumping by individual states. Global tax revenue is expected to increase by $150 billion.
Viktor Orban’s Hungarian government has declared that it does not want to support an EU minimum tax directive.
(Photo: via REUTERS)
The second element is greater taxation of corporate digital businesses. This is intended to prevent companies from drastically reducing their tax burden by shifting profits to low-tax countries. Just over 100 companies worldwide would be affected.
At the same time, this second part provided for a redistribution of tax revenue. So far, corporations have mainly paid taxes in the country in which they have their headquarters. In the future, they should increasingly pay taxes where they sell their products. 125 billion euros should be redistributed in this way.
At the end of this year, the OECD intends to present a detailed reform that is to be signed in Paris next summer. The big question is whether countries like the US will get them through their parliaments.
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In the US, a majority in the Senate is considered highly uncertain. According to many US politicians, the OECD’s tax plans are primarily aimed at US tech companies, but other US companies such as Johnson & Johnson are also affected. Not only among Republicans, but also among Democrats, skepticism is therefore great – also because the companies affected by the new taxes donate primarily to the Democrats of US President Joe Biden.
There is still optimism in negotiating circles. With their statements, the US side wants to increase the pressure to change details of the reform in their favor.
Alternatively, the Commission is planning an EU-wide digital tax
In addition, the United States has other problems: the Ukraine war, inflation, an impending economic downturn. It is hoped that the tax reform could slip through the US Senate unnoticed in the slipstream of these problems. “We are still determined to complete the reform and have no reason to deviate from our schedule,” said negotiators.
>> Also read: Liechtenstein’s head of government: There shouldn’t be any special rules for a global minimum tax
But secretly the EU is already preparing for the worst-case scenario. If the global solution fails, the Commission wants to introduce an EU digital tax, according to various capitals. However, this threatens to revive old trade disputes with the USA. The US government had already imposed tariffs against France in 2020 because Paris had launched a national digital tax.
The USA also plays a decisive role in the second part of the reform, the global minimum tax. The US government must adapt its tax system to the global minimum tax. Here’s hoping she still does.
Resistance has formed in the EU for this. This is how Hungary stands in the way: Viktor Orban’s government surprisingly declared in June that it would not support an EU directive on the minimum tax, having previously approved the reform.
In the face of Hungary’s veto, the finance ministers of Germany, France, Italy, Spain and the Netherlands said in September that they would introduce the minimum tax, if necessary, with the help of so-called “enhanced cooperation”. A joint statement states: “We are ready to implement the global minimum tax in 2023 with every possible legal means.” However, because this also requires the approval of other EU countries, this solution is also considered “not realistic”, says Rebecca Christie from the Bruegel Institute in Brussels.
If Hungary does not move, the other EU countries will have to implement the minimum tax nationally. Even then, the measure would have an effect because EU countries would tax companies all over the world higher. This would give low-tax countries a strong incentive to participate in the reform after all.
However, the German economy is worried that certain countries will push ahead. “We advise sticking to a globally standardized implementation,” write the CFOs in their letter to Lindner. “During implementation, Germany should ensure that there are no disadvantages for the German economy.”
Businesses are calling on the federal government to simplify tax reform.
(Photo: IMAGO/Chris Emil Janssen)
In negotiating circles, people are reassured: Of course, all countries would decide on the same content. Otherwise the reform would make no sense. And of course all countries would introduce the reform at the same time, Canada, Japan or Great Britain are already there. Therefore, a postponement to the year 2025 is hardly possible – and also not necessary.
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Like the CFOs in their letter to Lindner, the BDI industry association is also calling on the federal government to simplify the reform, according to a new BDI paper. “The federal government should lend a hand again in the national implementation of the minimum tax in order to simplify and streamline the requirements,” says BDI representative Niedermark. “Additional burdens on the German economy and its competitiveness must be prevented,” it is also said by circles of the Federal Ministry of Finance.
According to Handelsblatt information from negotiating circles, the OECD wants to take up the demands. The plan is to introduce a three-year transition phase for companies when introducing the global minimum tax.
Ironically, despite all the problems, the result could end up being exactly the reform that Scholz wanted. With the idea of a global minimum tax, he intended to end the debate about a digital tax. Now he could possibly succeed later without any action on his part.
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