- Update European tax policy by introducing an effective minimum tax
- Combat harmful tax competition by strengthening the responsible bodies and institutions
- Improve cooperation between member states by expanding the exchange of information in tax matters
- Introduce a financial transaction tax to ensure that financial markets help pay for public goods
Taxes to promote a strong Europe
Germany wants to use its Council Presidency in the second half of 2020 to promote a strong and sovereign European Union. Modern and innovative tax policies are essential for enhancing the EU’s economic strength. They are also indispensable for securing the tax revenue that member states need. A European architecture for fair and effective taxation will ensure that in a strong and sovereign European Union, competition can thrive in the internal market and beyond, and that the member states have sufficient financial resources at their disposal to finance measures for the common good of their citizens.
The processes of digitalisation have significantly changed corporate structures along with the way companies do business. The tax challenges associated with the digitalisation of business can be managed best through internationally coordinated action. For this reason, Germany is committed to ensuring that international decisions on (a) the fair allocation of taxing rights and (b) a global minimum effective tax are implemented at the European level.
As early as 1997, the member states of the EU agreed to establish a Code of Conduct Group (Business Taxation) in order to ensure fair taxation within the EU. This group is tasked with detecting and curbing harmful tax practices in EU member states. In addition, since 2016 the group has been entrusted with (a) reviewing third-country compliance with international standards of transparency and fair taxation and (b) engaging in dialogue with these countries. To further enhance the effectiveness of the group’s work, it is necessary to update the group’s mandate, which is now over 20 years old.
In addition, during its Council Presidency, Germany wants to improve member state cooperation in tax matters in order to ensure transparent, fair taxation practices. To this end, Germany seeks to expand the exchange of information in tax matters. In particular, more must be done to ensure that digital platforms report activities that are relevant for tax purposes. In addition, Germany wants to reach a consensus on the introduction of a financial transaction tax (FTT). Using the mechanism of enhanced cooperation, the German government is working together with other EU member states to adopt an FTT that will strengthen financial market participation in the financing of public goods.
To manage the economic effects of the Covid-19 pandemic, it is essential to protect and support workers and businesses. A fair and effective tax system will also help make sure that states obtain the revenue they need to provide such support in the coming years. All economic actors should contribute their fair share to the common good. Our vision of an equitable, transparent tax system in a globally linked world can best be achieved through concerted action.
Taxation of the digital economy
The advantages of digital technology have become especially apparent to us during the Covid-19 pandemic. While we have been self-isolating at home, digital technology has kept us connected to family, friends and colleagues. However, the spread of digital technology has also led to a growing number of new challenges relating to business taxation (as well as challenges in connection with data protection and data security).
Challenges posed by digital technology
As early as 1923, the League of Nations published a report addressing the question of which state has the right to tax income. The international community agreed that a state has the right to tax the income that is earned on its territory. In the 20th century, it was generally reasonably easy to determine what this income was: if a firm wanted to do business in a particular country, it had to be physically present there. In order to sell its products or services in that country, it had to set up a permanent establishment there. Today, digital companies no longer need to have a physical presence in a country in order to do business there. Furthermore, through the strategic placement of capital and intangible assets (such as inventions, brand names and publishing rights), multinational firms can shift their profits to low-tax jurisdictions and thereby reduce their tax burden to a minimum. Due to the progressive spread of digital technology, the “digital economy” cannot be defined as a separate economic sector. Rather, digitalisation affects nearly every area of the economy. As a result, the problem of profit shifting extends to many economic sectors.
In order to ensure a fair distribution of tax burdens, it is essential to adopt a comprehensive, sustainable strategy against the shifting of profits to low-tax jurisdictions. This strategy must be guided by the principle that taxation should occur where value is created.
Developing an effective response to the tax challenges posed by the digital economy is one of the German Council Presidency’s main priorities. Germany attaches great importance to a multinational approach in order to prevent the fragmentation of the international tax landscape. If every state were to develop its own strategy for taxing the digital economy, this would lead to a multiplicity of different taxes with different scopes. It would also lead to more red tape for businesses and possibly to international tax loopholes. Moreover, fragmented tax laws would be counter-productive to the goal of strengthening the EU internal market.
Currently, work is being done at the international level to formulate a strategy for taxing the digital economy. Negotiations on this matter are led by the OECD, and the G20 aims to reach an agreement by the end of 2020. The OECD’s efforts and deliberations in the fight against unfair international tax competition are being carried out constructively and productive
OECD efforts to counter unfair tax competition
Ninety years after the League of Nations published its report on the avoidance of double taxation (see above), the G20 asked the OECD to propose measures to fight base erosion and profit shifting (BEPS). These measures were published in 2015 and include recommendations for promoting fair taxation and transparency.
To complete the work on the main measure targeting the digital economy (BEPS Action 1: Taxes Arising from Digitalisation), 137 states and jurisdictions are currently working in the form of an “Inclusive Framework” that is soon expected to propose a concrete solution consisting of two pillars. Pillar 1 focuses on the reallocation of taxing rights, while pillar 2 focuses on the introduction of a global minimum effective tax (“global anti-base erosion mechanism”, or GloBE). The results will also be implemented by the EU.
Introduction of an effective minimum tax
Rules need to be put in place so that profit shifting is no longer “rewarded”. The aim of introducing a global minimum effective tax is to ensure that all companies – regardless of where their headquarters or permanent establishments are located – contribute their fair share to the financing of public goods.
The minimum tax is based on a proposal put forward by France and Germany, and it is one of the two pillars in the OECD’s strategy for taxing the digital economy. If a company’s profits are subject to excessively low taxes in another country, the source country (i.e. the country where the income was earned) can collect the difference between (a) the excessively low tax rate paid and (b) the minimum rate. In addition, tax payments in low-tax jurisdictions will no longer be deductible as operating expenses, or will be deductible only in part. This will both (a) make profit shifting less attractive and (b) secure tax revenue.
During its Council Presidency, Germany wants to smooth the way for the uniform introduction of a minimum effective tax in the EU. In order to counteract potential disruptions to the internal market, this will include analysing how international developments are likely to affect the EU and then incorporating relevant findings into EU tax law.
The fight against harmful tax competition
Since 1997, the Code of Conduct Group (Business Taxation) has been reviewing member state compliance with rules to combat harmful tax competition. In addition, since 2017 the group has been keeping a “black list” of non-cooperative jurisdictions for tax purposes. This means that the group’s role as a “watchdog” for fair tax competition is no longer limited to EU member states but also covers tax jurisdictions outside the EU.
List of non-cooperative jurisdictions for tax purposes
Twice a year, the Code of Conduct Group (Business Taxation) reviews international compliance with standards of good governance in tax matters and documents its findings. This process of “naming and shaming” has proven to be quite effective. Since the publication of the list, a number of jurisdictions have adopted measures to comply with BEPS recommendations, international transparency standards, and standards of fair tax competition.
As an additional step, EU member states agreed in December 2019 to introduce certain defensive measures against listed tax areas. Such measures will be applied starting in 2021.
However, the group’s principles for fighting harmful tax competition in the EU, which were adopted in 1997, have not been adapted to recent developments. In particular, the OECD’s recommendations in connection with its Action Plan on Base Erosion and Profit Shifting (BEPS), which were adopted in 2015, made the criteria for good governance in tax matters both stricter and more specific. Furthermore, the screening of tax jurisdictions outside the EU is not based on the principles adopted in 1997 but rather on the Council conclusions adopted in 2017.
These two divergent authorisations mean that the standards used to review the tax rules of EU member states are not the same as the standards used to screen third countries.
For this reason, it is necessary to update the group’s mandate to reflect its multifaceted functions. When this mandate is revised, it is crucial to take into account current discussions about a global minimum tax.
Strengthening administrative cooperation by expanding the exchange of information on tax matters
The EU directive on administrative cooperation in the field of taxation (DAC) has been in force since 2011. This directive has been revised and expanded several times since then. On 15 July 2020, the Commission submitted a proposal for another revision. Germany aims to complete the negotiations on this proposal during its Presidency.
Two key areas addressed by the proposed revision are: (a) the optimisation of existing instruments for administrative cooperation, in particular the legal provisions on joint audits, and (b) the introduction of reporting requirements for businesses in the platform economy, backed up by arrangements for the automatic exchange of information. Taxable income earned through digital platforms is not always reported to tax authorities, and the risk of detection is low. As the digital transformation of entire economic sectors advances, this poses increasing challenges to tax authorities in all member states. Germany is pushing to ensure that platform operators proactively provide tax authorities with information that is relevant for tax purposes.
EU-wide cooperation in this area will do more than just close tax loopholes. Rather, the adoption of a common reporting standard will further integrate the internal market, preserve competition between the digital and traditional economies, and reduce the time and effort that platform operators and taxpayers must expend to comply with reporting requirements and tax obligations.
Financial transaction tax
For many years now, discussions on the introduction of a financial transaction tax (FTT) have been taking place at the European level. Ten EU member states are involved in a process of “enhanced cooperation” with the aim of charging a tax on trades in financial products.
Under Article 326 et seqq. of the Treaty on the Functioning of the European Union, “enhanced cooperation” is a process that a subgroup of EU member states (a minimum of nine) may set up to pursue intensified integration or cooperation within EU structures in a particular policy area, without requiring participation by other member states. The member states involved in the enhanced cooperation process to introduce a financial transaction tax are Austria, Belgium, Estonia (until 2015), France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain.
The idea of introducing an FTT emerged in the aftermath of the 2008 financial crisis, with the aim of ensuring that financial actors take greater responsibility for the financing of public goods. The original proposal was published by the European Commission in 2011. After the member states failed to reach consensus on the proposal, an initial group of 11 member states agreed to continue negotiations on the tax within the framework of enhanced cooperation. Deliberations on the Commission’s proposed FTT were at a standstill for a number of years. For this reason, in 2018, Germany and France teamed up to advocate using the FTT already introduced by France as the basis for further negotiations. The other member states involved in the enhanced cooperation process agreed with this approach.
France’s financial transaction tax
In 2012, France introduced a tax on trades in shares of French firms whose stock market value exceeds €1 billion. The tax amounts to 0.3 percent of the trade value and is charged upon the purchase of shares. The tax can be charged only on shares of companies with headquarters in France.
The introduction of an FTT aims to ensure that the financial sector makes a fair and appropriate contribution to the financing of government functions. A tax based on the French model would be an important step towards the fair taxation of the financial sector. Currently, discussions at the European level are considering a tax rate of no less than 0.2 percent. At the same time, the FTT will not have relevant negative effects on financial stability, nor will it have a sizeable impact on savings patterns or attitudes towards shares – this is underscored by examples from other countries that have had similar national arrangements in place for many years.
During the coming months, the German Presidency will be striving to achieve a political agreement within the enhanced cooperation framework. This will make it possible to start the legislative process in the Council.
A smoothly functioning internal market provides the foundation for a strong EU. The internal market requires a sound financial basis to support the necessary spending on public goods. At the same time, the internal market’s performance is based on the economic and financial strength of businesses and their ability to succeed in global competition.
Solidarity, cooperation and joint solutions at the EU level will also help European countries overcome the economic effects of the Covid-19 pandemic. A fair and modern tax system is also essential for coping with future challenges.
During its Presidency, Germany intends to work jointly with its partners to make decisive progress in building a European framework for fair and effective taxation. The aim is to have a European regulatory framework in place that safeguards revenue by preventing harmful tax competition and further strengthening administrative cooperation among member states. Ultimately, coordinated solutions will benefit taxpayers as well as member states. This in turn will enhance the common good in Europe.