Tax policy reform between fairness and economic growth

At the tax collector, oil painting by Jan Massys (1539) © cea+/Flickr (CC BY 2.0)

In recent year several multinational enterprises (MNE) – mostly IT-based US companies – reported extremely low tax ratios for their profits earned outside the US. This fact captivated public attention and lead to a debate about the fairness of tax systems, in particular with respect to cross-border businesses. Subsequently, the changed focus of politicians lead to several reform projects – most important the action plan on Base Erosion and Profit Shifting (BEPS) presented by OECD/G20 leaders.

With this coordinated approach the industrialized countries want to set up a common standard for the taxation of cross-border business activities. The OECD wants to achieve a level playing field in taxation for national and multinational companies. They argue that the inadequately harmonized national tax systems give room for BEPS. Multinational enterprises (MNE) are supposedly able to shift profits from high-tax to low-tax jurisdictions which in turn leads to double-non taxation or less than single taxation.

This is a remarkable shift of focus since OECD’s main objective used to be the abolition of double taxation to promote economic growth. And even today this is still very important and not allowed to be neglected. The Federation of German Industries (Bundesverband der deutschen Industrie, BDI) supports fair tax competition – worldwide and in the European Union. However, the OECD clearly marked the corporate income tax as the most harmful tax for economic growth. In consequence, the OECD points out that any additional corporate tax revenue from BEPS countermeasures would enable the lowering of taxes on taxpayers or increased government spending, if the specific tax effects on macroeconomic growth are a concern. The BDI strongly backs up these considerations and asks for a lower corporate income tax rate or additional public investment if additional tax revenues arise.

In January 2016 the European Commission has published a proposal of a Directive (Anti-Tax-Avoidance-Package, ATAP) to implement several BEPS action points the same way all across Europe. Basically the BDI welcomes this approach but asks for some amendments in detail. In particular, the German business is concerned about the fact that all measures mentioned up to now deal with an improvement of tax enforcement and even though the OECD is asking for an improved arbitration process this important aspect is currently missing. Therefore the BDI urgently asks the European Commission to add an appropriate proposal. Additionally, the BDI calls on the European Commission not to go further than requested by BEPS action plan since uncoordinated action creates serious competitive disadvantages for companies in the countries involved.

The ATAP is announced to be the first step of the introduction of a Common Consolidated Corporate Tax Base (CCCTB) in Europe. The BDI welcomes this approach since the Anti-BEPS legislation is very complicated and puts high administrative burdens on firms. In summer 2016 the European Commission wants to publish another proposal which outlines the CCCTB.

Besides the proposal for an improved tax enforcement the European Commission also has plans for higher tax transparency. In consequence two different Country-by-Country-Reportings (CbCR) are planned. One of them implements BEPS Action point 13 uniformly in Europe. With the other one the European Commission creates its own CbCR-standard which includes an at least partial disclosure of information in companies’ financial statements. The BDI urges the European Commission to be as restrictive as possible in this respect because the publication of company’s details can lead to misinterpretation and competitive disadvantages.

To ensure that financial institutions contribute a fair and substantial contribution in covering the costs of the recent crisis eleven EU countries started a campaign to introduce a Financial Transaction Tax (FTT) via an enhanced cooperation. The BDI calls on the European Ministries of finance to scrap this project because we expect negative consequences for the real economy. Overall, the costs of the financial transaction tax would add up to several billions of Euros and would therefore lead to a massive additional burden on business and citizens alike.