The world is truly on the verge of a âcolossalâ upheaval in the taxation applied to large companies. This is how the German Finance Minister Olaf Scholz welcomed the agreement in principle concluded by 130 countries, under the aegis of the Organization for Economic Co-operation and Development (OECD). It can truly be described as historical. For the first time in 100 years, the global community is set to agree on a radical restructuring of the tax system that would make it fairer in relation to the global economy, including e-commerce.
The agreement provides that international companies will no longer pay taxes in the country where they register their headquarters for tax purposes, but where they make their sales. This would affect not only the big US internet giants like Alphabet, the parent company of Google and online retailers like Amazon, but also Chinese companies, French companies and German companies like Volkswagen, Daimler and Siemens, who would pay more taxes in the future in the countries that are their main markets.
Bernd Riegert of DW
Initially, it would only apply to very profitable companies with a turnover of more than 20 billion dollars (16.8 billion euros). However, this is a real revolution that will make the tax avoidance models offered by Luxembourg, Ireland, the Netherlands and many financial havens in the Caribbean and the Channel Islands less attractive.
The second pillar of the system would be the introduction of a minimum overall tax of 15% of profits, initially applicable to companies with a turnover exceeding 750 million dollars. This aims to prevent competition between countries with low tax rates. Even notorious suspects like Panama and the Cayman Islands have accepted it, which is suspicious to say the least. Maybe the deal still has loopholes after all?
Exceptions reduce the chances of success
Of course, even this “revolution” has unfortunate exceptions. Large banks and financial service providers were exempted, in response to pressure from Britain. The same goes for the oil industry – the result of brilliant lobbying by Saudi Arabia, Russia and multinational oil companies like Exxon. There are special rules for small states, that is, former tax havens. Investing in physical production facilities or logistics centers will reduce tax liability.
The United States is keen to get things done. Its new treasury secretary, Janet Yellen, anticipates higher tax revenues. The OECD has calculated that in total finance ministers can expect the deal to bring in an additional â¬ 100 billion to â¬ 150 billion. For Germany in particular, the increase will be relatively small – around 750 million euros – as German companies would pay more taxes in China and the United States in the future. Digital penalties, which already exist in the UK and France, and which the EU was planning to introduce, will need to be removed. This will allow the United States and Europe to resolve at least that element of the trade dispute.
The breakthrough has been made
The goal has not yet been reached. This agreement on global tax reform is voluntary and will need to be incorporated into national laws. But the largest group of 20 states will approve it. In the end, the recalcitrant Europeans – Ireland, Hungary, Estonia and Cyprus – will likely have no choice but to follow suit, or they risk sanctions. The approval of the US Congress will be the deciding factor. This is not obvious, due to the very small majority of the Biden administration, but it is absolutely imperative for the success of the “revolution”.
Many details, as well as the timetable for introducing the new tax system, are still vague and will need to be negotiated ahead of the October G20 summit in Rome, Italy. However, the breakthrough towards a better and fairer tax system has been made. Now we need to closely monitor whether the tax increase is actually paid by the business owners, or whether the consumers ie all of us end up footing the bill through the price increases.