The global tax revolution is coming

This was how German Finance Minister Olaf Scholz hailed the agreement reached in principle by 130 countries, under the guidance of the Organization for Economic Cooperation and Development (OECD). It really can be described as historic. 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 with regard to the global economy, including online business. The agreement envisages that international corporations will no longer pay taxes in the country where they register their headquarters for tax purposes, but where they generate their sales. This would affect not just the big American internet giants, like Google’s parent company Alphabet and online retailers such as Amazon, but also Chinese corporations, French firms, and German companies like Volkswagen, Daimler and Siemens, which would in future pay more tax in the countries that are their principal markets.

Initially, it would only apply to highly profitable companies with a turnover of more than $20 billion. Nonetheless, it is a genuine revolution that will make the tax avoidance models offered by Luxembourg, Ireland, the Netherlands, and many financial havens in the Caribbean or the British Channel Islands, less attractive. The second mainstay of the system would be the introduction of a minimum global tax of 15% of profits, applicable initially to companies with a turnover of more than $750 mn. This aims to prevent competition among countries with low taxation levels. Even notorious suspects like Panama and the Cayman Islands have agreed to it — which is suspicious, to say the least. Perhaps the agreement does still have loopholes, after all? Of course, even this “revolution” has unfortunate exceptions. Big banks and financial service providers have been exempted, in response to pressure from Britain. So has the oil industry — the result of some brilliant lobbying by Saudi Arabia, Russia, and oil MNCs like Exxon. There are special rules for smaller states, i.e. the former tax havens. Investment in physical production facilities or logistics centers will reduce tax liability. The US is keen to move things along. Its new secretary of the treasury, Janet Yellen, is anticipating higher tax revenues. The OECD has calculated that, in total, finance ministers can expect the agreement to bring in an additional 100-150 bn euros. For Germany, specifically, the increase will be relatively small — around 750 mn euros — because German corporations would in future pay more tax in China and the US. Digital penalty taxes, which already exist in the UK and France, and which the EU was planning to introduce, will have to be scrapped. This will enable the US and Europe to resolve at least this element of the trade dispute.

The goal has not yet been achieved. This agreement on global tax reform is voluntary, and will have to be incorporated into national laws. But the most important group of 20 states will approve it. Ultimately, the European holdouts — Ireland, Hungary, Estonia and Cyprus — will probably have no choice but to follow suit, otherwise they may face sanctions. US congressional approval will be the deciding factor.

This is not a given, because of the Biden administration’s razor-thin majority, but it is absolutely imperative for the success of the “revolution.” Many of the details, as well as the timetable for the introduction of the new tax system, are still vague, and will need to be negotiated before October’s G20 summit in Rome, Italy. However, the breakthrough toward a better and fairer taxation system has been made. Now we must keep a close eye on whether the increased taxes are indeed paid by the corporations’ owners, or whether consumers — i.e. all of us end up footing the bill by way of price increases.

This article was provided by Deutsche Welle