DThe shot with the minimum tax could backfire for Germany. This emerges from an analysis that will be published this Monday in the trade magazine “Der Betriebs”. “Contrary to the objective of the minimum tax, there could be increased profit shifting,” emphasize Christoph Spengel, Inga Schulz and Sarah Winter in the article “Tax planning under the global minimum tax”.
It shows that “the interaction of the minimum tax and the existing preferential tax regime leaves room for tax planning strategies that significantly harm high-tax countries like Germany.” Spengel is chair of business taxation at the University of Mannheim, Schulz and Winter are doctoral students.
The minimum tax is one of two pillars on which the global reorganization of taxation rules rests, on which 137 countries and jurisdictions have essentially agreed. While work on the minimum tax has progressed to such an extent that it can no longer be stopped, at least in Europe, there are always question marks behind the planned redistribution of taxation rights among highly profitable corporations in favor of the countries in which they do business but are hardly physically present are.
The minimum tax aims to reduce profit shifting
The minimum tax is intended to ensure that companies with a turnover of at least 750 million euros pay at least 15 percent income tax in all countries in which they are represented. The aim is to curb profit shifting that is purely tax-motivated. If one country effectively places a lower burden on companies, other countries will be able to make greater use of the parent company in the future. If the group holding company is based in a tax haven, the tax deduction of payments to the parent company for subsidiaries can be limited. In this way, the minimum rate should definitely be achieved, directly or indirectly.
The three authors remind us that the revenue expectations in favor of the local tax authorities have collapsed over time. Initially, scientific studies estimated an annual revenue of 1.2 to 13.3 billion euros for Germany. There is now an EU directive on minimum tax, which must be implemented into national law by the member states by the end of the year. In mid-June, the Federal Cabinet passed a draft law on this matter.
With accompanying measures, additional income of just 20 million euros can be achieved. In addition, indirect, unquantifiable additional tax revenue is likely to arise through behavioral adjustments and the relocation of the tax base back into the country, according to the draft law. But at the same time it also says: “In addition, indirect, not specifically quantifiable tax revenue shortfalls in trade tax, corporation tax, income tax and solidarity surcharge are likely to arise through behavioral adjustments and relocation of the tax base abroad.”
Different treatment of patents and research
Things become difficult because some countries provide tax breaks for specific income, such as from patents and trademarks, or treat research and development expenditure more favorably. There are also regions in which companies are allowed to set fictitious costs for equity capital so that the financing of investments through loans is not promoted by tax law. Both can lead to the effective tax burden on profits in a country falling below the critical mark of 15 percent, although this rate applies to corporate tax.
The three scientists calculate that it can be worthwhile for a group to outsource business functions such as accounting, IT, human resources, call centers or factoring abroad in separate units that provide services for other group companies. In this way, the group could avoid additional taxation that would be associated with the low burden on profits from intellectual property. By postponing real economic activities, the supplementary tax could be minimized and preferential regimes could continue to be used, they write.
The situation is similar with the regimes that are intended to prevent discrimination against equity capital. They also create a “similar, although weaker, incentive to shift additional, non-subsidized profits,” it says. Ironically, the EU Commission is planning exactly such a system. The researchers believe that the planned implementation of this initiative contradicts the minimum tax because it represents an additional tax design element when applying the minimum tax. The result of the analysis is striking: What is supposed to slow down the purely virtual shift of profits has the potential to achieve something even more unpleasant – namely the outflow of real economic activities.
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