The Finance Ministry is working towards fair corporate taxation at the international level, thereby establishing a more level playing field. This includes ensuring that large international companies also pay taxes, just like local small and medium-sized businesses. Companies that operate and make profits in Germany need to pay their share when it comes to financing public goods in the country. The agreements that have been reached at the international level consist of two “pillars”.
The main element of Pillar One is a mechanism which will reallocate taxing rights with respect to the world’s largest and most profitable corporations, especially in the digital economy. As a result, multinational enterprises, including digital companies such as search engine operators, will in future also pay tax where their users are located.
Pillar Two provides for the introduction of a global minimum effective tax rate, among other things. Implementation is already well underway. The minimum tax rate is being implemented everywhere in the European Union, Switzerland and the United Kingdom, as well as in many non-European countries such as Canada, Japan and Australia.
On 16 August 2023, the federal cabinet adopted the government draft (in German) of an Act Implementing Council Directive (EU) 2022/2523 on Ensuring a Global Minimum Level of Taxation and Other Accompanying Measures (Gesetz zur Umsetzung der Richtlinie (EU) 2022/2523 des Rates zur Gewährleistung einer globalen Mindestbesteuerung und weiterer Begleitmaßnahmen).
The two-pillar solution is an example of successful global cooperation in the area of taxation. The international community has taken important steps towards appropriate taxation of the world’s largest and most profitable companies. A total of 143 countries and jurisdictions are working on an equal footing in the OECD’s Inclusive Framework on Base Erosion and Profit Shifting (BEPS), the body which has been dealing with this project under the auspices of the OECD.
You can find detailed information on both pillars in our frequently asked questions on global minimum tax.
Enhancing fairness and promoting inclusivity
Recently, agreement was reached on the “July Package”, which represents another major step towards finalising the reform of international corporate taxation. The package clarifies the key elements and consists of four parts: (1) the multilateral convention on amount A of Pillar One, (2) the basic framework with a roadmap for amount B of Pillar One, (3) a model provision with a commentary and a multilateral instrument on the Subject to Tax Rule (STTR) under Pillar Two, and (4) a mandate for the OECD to prepare a comprehensive proposal to help developing countries implement the two-pillar solution. The G20 finance ministers and central bank governors have welcomed this progress.
As part of the July Package, work was successfully concluded on the STTR as an additional component of Pillar Two. The STTR is aimed at ensuring a minimum level of tax in relation to certain cross-border intra-group payments. In particular, it is intended to make it possible for developing countries to regain taxing rights. This is a key component in increasing the fairness of international taxation rules and further promoting inclusivity, especially for developing countries.
Progress in the definition of taxing rights
Progress has also been achieved in relation to Pillar One. The previous rules on how taxing rights on corporate income were allocated between countries and jurisdictions were mainly based on where the company had a physical presence. As a result, they did not always lead to appropriate outcomes in the case of digital business models. Amount A under Pillar One is intended to rectify this situation by reallocating part of the taxing rights on corporate income to market jurisdictions. Amount A will be implemented via a multilateral convention (MLC), which is being developed at the OECD level. At the same time, the participating countries will not impose any unilateral digital taxes or similar measures.
It is encouraging that so many countries are working on a joint solution. Once an agreement has been reached on the final details of the MLC, a group of countries around the world will be supporting the credible and effective implementation of the new rules internationally, thereby avoiding a patchwork of different national digital taxes. In the current global political climate, such a united approach cannot be taken for granted. This clearly shows just how great the desire is to find a consensus on this issue.
Unbureaucratic and easy-to-use rules
Germany consistently advocates rules that are easy to use in practice. We succeeded in making sure that the new rules on the reallocation of taxing rights do not have to be applied across the board. Instead, they will initially be restricted to a small number of multinational companies. In Germany, around 10 multinational enterprises are expected to fall within the scope of the new rules. Globally, the number of companies affected is estimated to be around 100. The plan is to first gain experience with the new framework in this way, before the rules are expanded to cover other groups of companies.
Germany is committed to ensuring that stakeholders can implement the new rules with as little red tape as possible. This will be achieved through a far-reaching centralisation of the administrative procedure (“one-stop shop”). Simultaneously, we want to harness the impetus for reforms that is coming from the international discussion to also review our domestic tax rules. Here, too, we can make improvements, in order to make Germany more attractive as a place to do business, and to ensure fair competition between countries.
The primary objective is not to generate tax revenues, but to ensure a fair allocation of revenues between different countries. With the new rules, we are creating a level playing field between countries. The ifo Institute has presented calculations on the fiscal consequences of the new rules. According to their calculations, Germany can expect moderate additional revenues as a result.