Alongside France, Germany is the driving force behind the current OECD proposal to set a lower limit to tax competition using an international minimum tax. Through doing so, they hope to take the wind out of the sails of a debate about the redistribution of taxation rights for the globalised economy. For trading nations, there is much (tax revenue) at stake with a change that shifts taxation rights from a company’s residence to the market in which it sells its products.
The OECD’s Global Anti-Base Erosion Proposal (GloBE) upholds the roughly hundred-year-old international tax consensus which primarily taxes corporations’ profits in their country of residence. But it also ushers in a paradigm shift, as Erik Röder, a senior research fellow at the Institute, explains in his paper “A Global Minimum Taxation of Multinational Companies?”
A Paradigm Shift in International Tax Law
GloBE would allow the parent company’s country of residence to tax the profits of foreign subsidiaries if their tax burden falls below a certain uniformly specified minimum tax rate. Thus, the OECD is departing from the previous consensus that competition surrounding tax rates for real investments – i.e. the location of research centres, factories of corporate headquarters – is legitimate. The GloBE proposal holds that very low tax rates are “harmful” or “unfair”. Most countries have so far only used top-up taxation to prevent the transfer of accounting profits to jurisdictions with low tax rates. They have therefore maintained the separation principle that excludes the profits of foreign subsidiaries from taxation in a parent company’s country of residence.
GloBE goes one step further. The so-called income inclusion rule takes into account not only passive but also active income from subsidiaries, providing their taxation level falls below the minimum tax rate. The so-called undertaxed payments rule, which limits the deduction of operating expenses for payments abroad, is designed to prevent companies from establishing holding companies outranking the pre-existing head office in low-tax jurisdictions. At first glance, the basic concept may appear an impressive way of limiting international tax rate competition, says Röder. However, the proposals are truly complex in their design. For example, the OECD was unable to discuss the undertaxed payments rule in its first GloBE consultation because the details were still missing.
Röder explains that Germany has played a leading role in encouraging this paradigm shift and is investing considerable political capital in the introduction of a minimum tax. However, the Federal Minister of Finance cannot expect the GloBE proposal to noticeably ease tax rate competition for real investment. From Germany’s perspective, an internationally agreed minimum tax rate of 10% to 15% would be too low, since competition would remain between countries with significantly higher tax rates, including Germany. A minimum tax rate set unilaterally by Germany to be close to the current German level of taxation would also be counterproductive from a competition perspective.
However, even if GloBE does not relieve Germany of tax competition, the proposed minimum level of taxation could, according to Röder, help make profit relocation less attractive for multinational companies. Röder notes that this would require the consolidation of the income inclusion rule and German top-up taxation, which requires fundamental reform in any case. There is no getting around this anyway when implementing the GloBE proposal, and it would have the advantage of abolishing the highly complex and abuse-prone current system of separating active and passive income. Erik Röder proposes that the type of income (active or passive) would only be relevant for the level of subsequent taxation in Germany. For this purpose, a narrow, closed list of passive income types, primarily including interest payments and royalties, would suffice. Röder discusses further technical details, such as the amount of tax on active and passive income that would be charged, or how the tax base could be determined for the new consolidated legal regime. Finally, he discusses the compatibility of the proposals with European Union law.
Röder, E. Weltweite Mindestbesteuerung mulitnationaler Unternehmen? Der Global Anti-Base-Erosion-Vorschlag der OECD und seine Relevanz für das deutsche Unternehmenssteuerrecht. StuW, 1/2020, 35-47.
December 2020