Germany Should Refrain from Unilaterally Introducing a Global Minimum Tax

The global corporate minimum tax is on the way. In mid-2021, 137 countries agreed on the introduction of a worldwide minimum tax for multinational corporations. However, the minimum tax will only work if it is introduced on a global scale and if tax base calculation methods are harmonised internationally. A recent ZEW policy brief strongly advises against a German solo effort. This would neither curb tax competition nor generate meaningful additional tax revenues, but would create high costs for administration and compliance and harm Germany’s attractiveness for corporate investment.

The minimum tax ensures that every corporate entity – regardless of where it is located – is subject to a minimum tax level of 15 per cent. This applies to corporations with consolidated revenues of at least 750 million euros. However, this requires that the minimum tax is actually implemented globally and that the tax base calculation methods are harmonised. “Due to non-cooperative countries as well as current political tensions, it is unlikely that these conditions could be fulfilled. As a result, (partial) implementation of the scheme would merely change the nature of tax competition, rather than reducing it,” says Professor Christoph Spengel, Research Associate at ZEW.

The ZEW experts have calculated the compliance costs that would be borne by corporations as part of the global minimum tax, based on a company survey. “Our estimates show that the additional tax declaration costs for affected German corporations would amount to almost 100 million euros annually for ongoing compliance and around 319 million euros for implementation,” Spengel explains. The effects of a sole implementation at the German as well as the EU level would therefore not only be highly questionable, but would also be accompanied by massive costs.

In September 2022, the Federal Ministry of Finance announced that Germany will introduce the minimum tax scheme on its own if necessary. However, it is questionable to what extent the German government can implement a minimum tax unilaterally. “A unilateral move is not advisable for Germany as it would not counteract tax-motivated profit shifting or international tax competition,” says Christoph Spengel. At the same time, a unilateral minimum tax would lead to high one-sided costs, while generating little in the way of new tax revenue. Also, a unilateral introduction would provide incentives to relocate real investments abroad, which would ultimately harm Germany’s attractiveness as a location for business and investment.

The global minimum tax is an ineffective means for curbing tax competition. According to ZEW experts, alternatives would be the abolition of preferential tax regimes, such as IP boxes, or of special agreements with the tax authorities. In addition, a targeted and reasonable extension of existing controlled foreign company (CFC) rules and an internationally coordinated extension of withholding taxes would be more effective means of curbing profit shifting without incurring additional costs.