analysis

G7 agreement Who will benefit from the global minimum tax?

As of: 06/09/2021 8:49 a.m.

The G7 agreement on a minimum tax is celebrated as an epoch-making one. But there are still many hurdles waiting for it to come into effect. There are reservations, especially in countries that make a living from their reputation as tax havens. By Klaus-Rainer Jackisch, MR Luxury yachts lie in the port of Nassau, sun-hungry people loll on the beaches and people know how to celebrate at the colorful Junkanoo, the national carnival: The Bahamas comprises 700 islands on the edge of the Caribbean. For many, they are a little paradise – also in tax matters. Since the island nation became independent in 1973, the country has lived on luxury, tourism and customs duties – and on its reputation as a tax haven. There is no income or corporation tax here, and tax evasion is not a criminal offense. That could soon be over. The Bahamas are also one of the 139 countries that have committed themselves to the so-called BEPS project under the umbrella of the OECD. BEPS (Base Erosion and Profit Shifting) wants to combat tax evasion and prevent the relocation of profits by multinational corporations abroad. The project is, so to speak, the backbone for the global minimum tax, the implementation of which received a strong boost last weekend: There the finance ministers of the seven leading western industrial countries agreed (G7) for the introduction of such a tax. It should be at least 15 percent worldwide and thus prevent tax dumping in many countries. At the same time, companies should in future not only be taxable where they are based – but everywhere they sell their goods or services.

G20 summit as the next hurdle

The agreement is intended to end the practice that companies like Amazon, Facebook or Google are making billions in profits worldwide, but are looking for and finding so many loopholes when paying taxes that in the end only peanuts remain for the tax authorities. Federal Finance Minister Olaf Scholz spoke of a “tax revolution” after the ministerial round in London. The British department head Rishi Sunak called the agreement “historic”, US Treasury Secretary Janet Yellen underlined it as an “unprecedented step”. When, after the finance ministers, the heads of state and government of the G7 countries meet at the end of the week in St. Ives in Cornwall, England, the decision should only be a matter of form. But the plan is far from being dry. In July, the finance ministers of the 20 most important industrialized and emerging countries (G20) meet in Venice, where they are supposed to approve the agreement. That should be much more difficult. While Europeans (Germans, French, British and Italians), Americans, Canadians and Japanese have similar interests in the G7 body, preferences in the G20, which includes China, Brazil and Russia, are less homogeneous. It is unclear whether they will come to an agreement in the end. Finally, all 139 BEPS states under the OECD umbrella would have to agree to the proposal.

Ireland fears revenue shortfalls

In order for the supposedly epoch-making work to really come into force, many interests have to be brought under one roof. Especially in smaller countries, the project is not only a source of joy: In Ireland, for example, where companies only pay 12.5 percent tax, which is why Apple and Google particularly like to romp around here, there are fears of large revenue losses. The minimum rate of 15 percent could theoretically flush more money into the coffers. But it is questionable whether the tech giants will continue to settle on the green island. Ireland’s finance minister, Paschal Donohoe, does not count on it and expects annual losses of up to 2.4 billion euros for his country: “Ireland could lose up to a fifth of its total corporate tax income,” he said in Dublin. There are worried looks in Switzerland too. Around 100 large companies have their headquarters here, because some cantons only charge around ten percent corporate tax after all discounts have been deducted. It is particularly cheap for companies in the cantons of Appenzell and Zug. In the capital, Bern, the opinion is that small countries in particular, which do not have the advantages of a large domestic market, can also score points in international competition with other advantages: low taxes are right at the top of the list, like a good infrastructure and a High standard of living. Before the G20 meeting, Switzerland wants to fight for every percentage point.

“German tax authorities do not gain much”

While small states in particular are already anticipating the worst, the US should be the big winner. Not only because most large companies are based here. But also because the complicated project plays into the hands of the big countries. Because even after a minimum taxation of 15 percent, no country is obliged to apply this rate. Ireland could stay at 12.5 percent. However, the mother country of the company can then collect an additional 15 percent difference. In the case of the numerous US companies, this additional levy then flows into the states. “Regardless of where a company is based and where it has subsidiaries, it always pays at least this minimum tax rate,” says the financial scientist Dominika Langenmayr from the Catholic University of Eichstätt-Ingolstadt. But that also means that more taxes are paid “above all in the USA, not in Germany,” said the economist. Clemens Fuest, President of the Ifo Institute, also sees it this way: “The German tax authorities will not gain much from the minimum taxation,” he told the “Augsburger Allgemeine”. His institute calculated that Germany would lose around 5.7 billion euros annually by shifting profits. But the minimum tax project should only allow “less than two billion a year” to flow into Germany, according to Fuest.

It depends on the details

Such an agreement also has other consequences for the export nation Germany: The car manufacturers, for example, sell a growing proportion of their products in China and the USA, but currently pay their taxes mainly in Germany. “If taxation rights are shifted to the sales countries in the future, Germany could lose tax revenues,” said Fuest. In the end, it depends on how the reform is designed. The last word has not yet been spoken and many a compromise is likely to come out. It is therefore questionable whether the EU will actually earn 50 billion euros more annually as a result of the reform, as Brussels loudly proclaims. This also explains why the multilateral corporations that the set of rules is supposed to meet are currently rather relaxed. The G7 agreement is “a welcome step” that will help stabilize the international tax system, a spokesman for the online shipping giant Amazon told the US news portal “Businessinsider”.

Will Amazon be spared?

The Amazon case in particular raises the question of whether the reform will actually be as effective as it has been described. The small print of the agreement also states that the reform should only affect the very large companies that have a profit margin of at least ten percent. However, Amazon only gives its overall margin of three percent and should get away with a final agreement on this rate largely unscathed – unless you tax the more lucrative business areas separately. However, this raises questions of tax justice and could trigger even more bureaucracy. It is also criticized that the minimum tax rate of 15 percent is much too low anyway. The British development organization Oxfam fears that this would lower the overall tax level worldwide rather than increase it. In any case, it is “absurd” that the G7 wanted to reform the tax system by “setting up a worldwide minimum tax that is similar to the low tax rates in tax havens such as Ireland, Switzerland or Singapore,” says Managing Director Gabriela Bucher. Meanwhile, the potential losers will do everything possible not to lose their advantage entirely. Until the rules come into force, many a yacht will moor in Bermuda’s capital Nassau. Because there are no high taxes in the island paradise (yet).

The G7 summit in Cornwall The heads of state and government of the seven leading industrialized countries (G7) will meet from June 11th to 13th in Cornwall, southwest England. For the first time in two years, they will meet again in person in the afternoon. In addition to climate change, the conference will also focus on trade issues and investments as well as the fight against the corona pandemic. In addition, the meeting will focus on the positioning towards Russia and China.
The G7 group includes the USA, Germany, Great Britain, Canada, France, Italy and Japan. Like-minded democratic states such as South Korea, South Africa, Australia and India are invited to the summit as guests.