Global tax policy: where Germany is suddenly a developing country

Little time? At the end of the text there is a summary.

Angola, Ethiopia, Botswana, Jordan, Colombia, Nigeria and Senegal: they all sent diplomats when the Left recently invited to a technical discussion in the Bundestag. The countries are unanimous that they are currently negotiating tax treaties with Germany. And Martin Hearson, economist at the London School of Economics (LSE), encouraged them.

"They have new allies," Hearson told the developing and emerging economies. These are used to Western companies exploiting their resources - often without leaving much money in the country. But now Germany, France or Great Britain are in a similar situation, according to Hearson. "The raw material is data."

The anger over Facebook, Google or Amazon has brought movement into international tax policy. The US corporations earn billions, but distribute them cleverly across the world. As a result, their tax rates are partly in the decimal range. The digital giants are helping to ensure that their businesses are barely linked to factories, shops or offices in individual countries.

However, to get some cake, France and some other EU countries have now announced their own digital taxes or have already decided. They are levied on the revenues with users instead of the profits as usual. "Everyone understands that we want to get the money where it is," said France's Finance Minister Bruno Le Maire. "You can no longer work with the tax laws of the 20th century."

Saul Loeb / AFP

Bruno LeMaire

Are Europeans now fighting for a new system that distributes tax revenues differently in the world? At any rate, Le Maire's counterparts in Africa, Asia or Latin America could listen with his words. So far, the EU countries themselves have effectively prevented their corporations from letting large sums of money abroad.

Hearson came to this conclusion after examining 519 double taxation treaties on behalf of the left-wing parliamentary group in the European Parliament. With such contracts, states regulate when they are allowed to tax transactions of foreign companies on their territory. For example, how much money will Botswana spend if a Western corporation mines diamonds? Among other things, this depends on when the country may levy its own withholding taxes. Or after how many months in the country a corporation must establish its own permanent establishment.

Hearson's conclusion: EU members allow developing countries to enjoy lower taxation than they could afford or agree with other industrialized countries. The Germans seem to be among the toughest negotiators.

According to an index calculated by Hearson, Germany left developing countries on average only one third of the possible taxation rights. In the EU average, there are 40 percent, Finland even granted a good half. "Double taxation agreements in the German negotiation practice are characterized by the interest to secure as much as possible a tax base for Germany," wrote the scientific service of the Bundestag in a report. "Development policy aspects are only occasionally traceable in the agreements."

"Germany is very residence-based," says Hearson. This means that German companies should pay their profits, especially where their headquarters are. A digital tax would soften this principle and is seen in Berlin accordingly skeptical. The Federal Ministry of Finance of Olaf Scholz (SPD) fears that Germany's export-strong companies could increasingly be asked to pay abroad - for example, for cars they sell in China.

The orientation on the export industry is "deeply inscribed in the Ministry of Finance," says Thomas Rixen, political scientist at the University of Bamberg. "Department heads and speakers are making this policy, which has not changed so far when the party colors of the minister change."

And so, unlike the French or Austrians, Scholz does not want to introduce a national digital tax yet. At EU level, it failed again in other states: countries such as Ireland or Sweden are themselves the seat of digital companies, with which they do not want to spoil it. Does everything ultimately remain the same, because each country looks at its own revenue?

An exclusive club opens

At least the attempt of a new beginning should exist: By the end of 2020, 128 states under the auspices of the Paris-based industrialized countries organization OECD are negotiating tax reforms for the increasingly digital economy. One suggestion is worldwide minimum tax rates, for which Scholz is strong.

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OECD headquarters in Paris

On the other hand, another proposal would significantly increase the taxation rights of foreign corporations. Thus, even a website in the national language or settlements in the national currency would be indicative of a "significant economic presence" that may be taxed. The concept comes from the G24 countries, which include India, Colombia and Ghana.

"Developing countries are seizing the opportunity and organizing themselves in the digitization discussion," says Hearson. In the past, however, these states would only have been able to accept agreements that had previously been negotiated within the industrialized countries organization OECD. "Historically, this is a very exclusive club," says Thomas Rixen. "Meanwhile, all countries are invited to come to Paris."

The political scientist has long been researching what a fairer global tax system could look like. So Rixen proposes an International Tax Organization (ITO). It could use agreed formulas to determine the sums that a multinational corporation must tax in different countries. The respective amount of the taxes would be left to the individual states. However, as with the World Trade Organization (WTO) today, arbitration tribunals could decide whether a country with particularly aggressive tax cuts operates unfairly.

The times for setting up international organizations were certainly better than under a US President Donald Trump, who is already dismantling the WTO. But Hearson sees in the debate over digital taxes at least a first step towards more global approaches to taxation. For even within the industrialized countries there is a "collapse of the usual, consensus-based, uniform approach to corporate taxation".

Vietnam learned about it

At the same time, the scientist observed a growing self-confidence of poorer countries. A negotiator from Vietnam admitted that his country had too little experience in the first double tax treaty negotiations. According to Hearson, Vietnam is now known as a "tough and effective negotiator." There is a growing awareness in other countries that tax treaties have not been negotiated with sufficient care in the past.

Maria Swärd / Getty Images

View of Nairobi

This opinion was also in mid-March, judges at the Kenyan High Court Justice Weldon Korir said that a double taxation agreement with the tax haven Mauritius was "no longer effective and invalidated." The government had not sufficiently involved Parliament in the hearing. The Nairobi-based non-governmental organization Tax Justice Network Africa complained against the agreement. Following its success, it called on the Kenyan government to review agreements with countries such as the Netherlands, the United Arab Emirates and China.

Even if tax revenues are not being redistributed all over the world in the near future, many countries could argue more resolutely in the future.

In summary: The debate on the taxation of US digital companies has brought movement into international taxation policy. Like the developing countries, industrialized countries are now criticizing that they are insufficiently involved in the profits of foreign companies. This increases the openness towards new concepts that are to be discussed under the auspices of the OECD.