Levying a Uniform VAT Eliminates the Need for Global Tax Reforms
Research
To prevent the introduction of national digital taxes and maintain uniform international tax policy standards, the OECD has made proposals for a global corporate tax reform. Besides being highly complex, these proposals entail avoidable costs for businesses and tax authorities, and go well beyond what is necessary to achieve an appropriate tax level for multinational digital companies. According to tax experts of ZEW Mannheim and the University of Mannheim, it would be more advisable to rely on already existing tax systems. In order for market states to generate higher tax revenues from digital transactions, it would be a much simpler and more efficient solution if VAT were systematically levied on digital services, transactions in the sharing economy and non-monetary transactions.
As digitalisation progresses, new forms of value creation emerge. Many countries believe that this allows internationally operating digital companies such as Amazon, Google or Facebook to minimise their tax burden through aggressive tax planning. At the same time, especially those market states which are mainly on the demand-side of digital products and services feel disadvantaged in terms of tax revenues from digital transactions. In order to put a stop to this, and also to get a fair share of taxes from companies in the digital economy, many countries are planning to introduce national digital taxes. To prevent this from happening, the OECD has put forward its own proposals for comprehensive global corporate tax reform, which go far beyond a more appropriate tax level for globally active digital companies.
Proposal could increase tax competition between OECD member countries
The OECD proposal is essentially based on two pillars. On the one hand, the market states are to receive a greater share of the tax revenue than in the past. For this purpose, the consolidated profits of the companies are divided into routine and residual profits, of which the countries then receive different shares. Professor Christoph Spengel, tax expert at ZEW and the University of Mannheim, is particularly critical of the OECD’s intention to tax companies by distributing a marginal part of their residual profits among countries in proportion to the share of turnover generated in the respective countries. “To implement this type of turnover-based distribution, tax authorities need to be able to pinpoint the jurisdiction where the turnover was generated. In the case of multinationals, this is only known to the company headquarters. The competent tax authorities thus have to invariably report the taxable share of turnover to the countries entitled to these tax payments,” explains Spengel. This is a very complex procedure, which will most likely make an additional competent supranational authority necessary. “Creating a taxable nexus based on sales, with no need for a physical presence, would extend the taxing right to all types of businesses, even to exports,” Spengel adds.
The second pillar of the OECD proposal aims to mitigate the risk of companies shifting their profits to low-tax countries. The proposed coordinated approach to introduce a global minimum tax and a deduction disallowance is, however, not limited to digital companies and well out of proportion with the intended goal of ensuring a fair taxation for digital businesses. Implementing this proposal could in fact reduce the attractiveness of shifting profits and moving their registered headquarters to low-tax countries. This proposal could also increase tax competition between OECD member countries, with the coordinated minimum tax rate setting a lower limit to competition. “In addition, the risk of double taxation would also rise if all countries try to expand their access to the tax base of multinational enterprises,” explains Christopher Ludwig, tax expert at ZEW.
The tax experts from ZEW and the University of Mannheim conclude that unless the potential weaknesses of the OECD proposal are addressed through global standards, it would be more effective to implement measures based on existing tax systems. They therefore call for expanding the concept of withholding taxes and shifting the focus to VAT, a pragmatic solution that could be implemented quickly to overcome pressing tax issues in the age of digitalisation.