For years now, German Finance Minister Wolfgang Schäuble and other politicians around the world have been calling for an end to the shenanigans pulled by multinational companies that allow them to avoid paying hundreds of billions in taxes.
Companies like Apple, Google, Starbucks and General Electric have been shuffling billions in profits from country to country until they barely pay any taxes to any nation.
It was all quite legal, with small countries like Luxembourg, Ireland and Panama long known for helping such multinationals skirt the system by creating shell corporations made up of little more than a postbox – and profiting in the process. It’s a system that has outraged not just politicians but regular citizens across much of the world.
This is finally set to change. The most ambitious international effort in decades to rewrite the rules and close tax loopholes is set to be adopted by finance ministers at a meeting of the G20, a group of the 20 most powerful nations, on Thursday in the Peruvian capital Lima.
The global tax problem is huge, but it’s also increasingly understood after a series of damaging scandals brought much of the shady loophole system to light in the past few years.
Dodgy tax deals cost countries at least $100 billion in lost revenue per year, according to the Organisation for Economic Cooperation and Development. The OECD, which helped develop the new rules and will be charged with monitoring them, is publishing a multi-thousand page report this week on the effect of what’s called “base erosion and profit shifting,” or BEPS.
But after years of demanding a crackdown, it now seems that some in Germany are having a change of heart. Ironically, there are concerns that Europe’s largest economy, which relies more on exports than domestic consumption, could lose more money than it gains from the overhaul.
That’s because, to crack down on tax evaders, finance ministers are having to rewrite the entire global rule book.
“It’s unlikely that Germany would emerge as the winner in this case.”
“In principle we support the BEPS project,” said Ralph Brinkhaus, a parliamentarian from Germany’s Christian Democratic party that is led by Chancellor Angela Merkel. But there are points “that concern us and must be clarified,” he added.
The concern lies with the method. The key to closing loopholes is to force companies to pay the majority of their taxes in the countries where they operate, have most of their employees or earn their profits. Some here fear this could disadvantage Germany’s export-focused economy – and even push some firms to shift more of their resources abroad.
For example, Germany might get more tax revenue from U.S.-based companies like Apple, Google and Amazon, but it could lose out on taxes from German companies that sell most of their goods to China.
“Tax revenue wouldn’t increase, it would only be distributed differently,” said Markus Kerber, chief executive of the industry association BDI. “It’s unlikely that Germany would emerge as the winner in this case.”
The German finance ministry disputes this, however. Mr. Schäuble’s experts assume that German tax authorities would ultimately benefit.
Due to the criticism coming from within the German federal government, the OECD is also doing its best to explain the project. The idea is that profits should no longer be moved through shell corporations into tax havens, but instead should be taxed where they were earned by companies with employees.
The OECD argues that overall tax revenue would indeed be greater when companies are forced to pay the billions in taxes they have previously sidestepped.
The G20’s new planned reforms are essentially all about information exchange. Multinational corporations with more than $750 million in sales would have to report back to their home nation’s tax authority their total sales revenue and profits, as well as how many employees they have and how much they have paid in taxes.
The home country would then distribute the list of “country-by-country reporting” to the tax authorities of all countries listed therein. The data would not include trade secrets, such as details about internal prices, but it should allow authorities to see whether the firms are hiding profits in shell companies.
Companies will have time to adapt. The transition period from the existing rules structure is set to last until 2021. In addition, countries would exchange information on which legally-binding tax ruling agreements they have entered into with various groups.
Special tax deals with companies that lowered their tax burden – a practice long done by Luxembourg to lure firms to its lands – would no longer remain hidden.
In theory, these efforts to tax multinationals more effectively could bring in more tax revenues for individual countries, but not everyone is convinced they will benefit overall.
“Country-by-country reporting could also be a gateway for industrial espionage.”
Tax revenue is not the only worry for Germany, however. CDU finance expert Mr. Brinkhaus and the BDI are concerned that the United States will not play along.
“I fear that BEPS could be blocked in Congress,” he said. Letters from Republican congressmen to U.S. Treasury Secretary Jack Lew circulated in Berlin point out that tax law could be decided by the legislature alone.
In addition, Mr. Brinkhaus pointed to bureaucratic burdens for businesses, because they would have to document which revenues and profits they generate in which country, and with how many employees.
“This country-by-country reporting could also be a gateway for industrial espionage,” he said.
The experts from the OECD dismissed this. There are a lot more security elements built into the rules, claimed the organization. In Berlin, too, one government member tried to calm the fears, saying: “We have no interest in stripping German companies naked.”
But while the new rules are intended to prevent tax avoidance, they will not stop countries from competing by lowering their corporate tax rates, the OECD noted.
Indeed this is also one of the reasons Germany is worried. One example is the popular tax shelter known as the “patent box.”
This tax trick involves tax privileges for profits that emerge from research. To date, most patent boxes are located in countries such as the Netherlands, Ireland, Spain and the United Kingdom. Many are fronts rather than true research companies.
New rules would mean that only profits from the real work of research departments would be able to see tax benefits, with front companies no longer benefiting from this loophole. These tax vehicles will not be prohibited completely, but will only be limited to gains from real innovations.
In Germany, there are fears that closing the loophole could actually encourage companies to move their entire R&D operations. Mr. Brinkhaus said he’s worried that companies might relocate entire research departments to low-tax countries and not just their patent depository.
Four other major rule changes, in addition to the new reporting standards under consideration, also include provisions for abuse, arbitration and implementation.
On the subject of abuse, any existing tax treaties between nations would have a clause inserted, prohibiting the exploitation of different rules for the purpose of tax avoidance.
If there were a dispute between countries as to where a group has to pay tax on what profit, arbitration would proceed with clear rules. Today there are approximately 5,000 undecided tax disputes worldwide: The OECD experts expect such disputes will be settled more quickly under the new rules.
Countries would also allow the OECD to examine whether governments really implement these four new rules.
Just as with lists of tax havens in the past, the OECD expects the information sharing to have a public shaming effect. Even Panama, which has long operated as a tax haven for companies, is now set to cooperate with the system for automatic exchange of information on tax evaders.
The remaining eleven rules define international standards for corporate audits. Corporations that crack down on tax evasion within their own walls and behave legally will as a result have less competitive disadvantages, according to the OECD.
The effects of the new rules will be closely watched, however. The German finance ministry is keeping its nose to the ground: It will be monitoring the impact of the OECD rules and then decide “what steps are necessary in Germany,” it said in a statement.
Jan Hildebrand leads Handelsblatt’s financial policy coverage from Berlin and is deputy managing editor of Handelsblatt’s Berlin office. Donata Riedel covers economic policy for Handelsblatt. To contact the authors: email@example.com and firstname.lastname@example.org