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Tax avoidance and profit shifting IW News 2. June 2015

It’s not only the company

A few days before the G7 meeting in Germany, the G7 finance ministers discussed new strategies in order to fight profit shifting by multinational enterprises. Unfortunately, it seems that the politicians forget about their own responsibility for a fair international tax system.

Recently, global players such as Google, Starbucks, Apple or Amazon are heavily criticized for their low tax payments compared to their huge sales volumes and profits. The G7 finance ministers now want to stop sophisticated tax planning approaches which shall minimize a company’s tax burden. More transparency and a better exchange of information between the national tax authorities are the key factor of the so called BEPS Action Plan provided by the OECD. For instance, international tax audits shall guarantee in the future that multinational enterprises pay a reasonable amount of taxes since the corporate sector – like workers and employees – has to pay its part to finance, amongst others, infrastructure and education.

However, the common goal of the G7 finance ministers suffers from the pitfall of tax regulation. A basic principle in international tax law is that non-taxation as well as double taxation has to be prevented. Yet, double taxation of profits might happen against the background of the existing tax practice as illustrated in the following example: Assuming that from an economic perspective the profits of a multinational enterprise operating in Germany and France have to be allocated fifty-fifty to the local companies. However, due to the company structure all profits are allocated to the French company. Thus, there are – for the moment – no taxable profits in Germany. In this case, the German tax authorities are absolutely right in adjusting the profit and demanding a tax payment from the local entity, while the French colleagues are happy with the high profits and a high tax payment in their jurisdiction. The French tax authorities will not be willing to reimburse any taxes even if they had to according to economic principles.

Against this background, the G7 prime ministers would be right to critically discuss their own role in the context of international taxation when they meet this weekend. Fair taxation means that double taxation is prevented in the same ways as non-taxation is. This should be emphasized as an essential goal by the politicians. However, a precondition for achieving this goal is the willingness of countries not to claim taxes if there is no economic reason for doing so but to resign in favor of a second country. By looking at this crucial aspect, only time will tell if the politicians really want to set up a fair international tax system.

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