Amazon also in its sights: will corporate tax dumping be stopped?

Amazon is also in its sights
Will corporate tax dumping be stopped?

From Marina Zapf

Corporations like Amazon earn billions and still pay hardly any taxes. The trick: they’re shifting their profits to tax havens. But that could soon be over.

The online retailer Amazon achieved record sales in Europe in 2020, but paid no taxes. According to research by the British Guardian, the Amazon EU branch in Luxembourg reported a loss of 1.2 billion euros. The fact that corporation tax is bypassed is due to a generous credit in the tax haven of Luxembourg. In Germany, for example, revenues rose by 33 percent, as the platform giant reported to the US stock exchange regulator, and in Great Britain by 50 percent.

Amazon is just one of many corporations where critical financial politicians keep seeing red. The accusation: international corporations operated “aggressive tax planning”. In practice, this means that profits are posted to subsidiaries in attractive low-tax countries like in a marshalling yard. For example, Amazon roads, infrastructure, and public services benefit, but they do not make a fair contribution to the common good. German DAX companies also have hundreds of subsidiaries in tax havens. All companies pledge to act in accordance with the law.

However, their tightening is currently picking up speed. Germany, too, is tightening its domestic legislation. In addition, tax avoidance could soon be pushed further internationally. For the first time after years of negotiations, a political agreement is within reach. “We have a great chance of agreeing on a global minimum tax in the summer,” said Finance Minister Olaf Scholz in an interview. What is meant is a reform of the industrialized countries organization OECD for “Base Erosion and Profit Shifting (BEPS)”, which aims to end the “race to the bottom”, the undercutting race of tax havens.

Who will benefit?

Part of the reform package is a minimum tax on corporate profits, for which US President Joe Biden recently proposed 21 percent. Since the US is now pulling together with other high-tax countries – the idea for the minimum tax came from Germany and France in 2018 – an agreement is possible. However, there is still a dispute about the level of the minimum threshold. There is also no consensus on the question of the size of corporations affected. The extent to which the German tax authorities would also benefit will largely depend on this. “Investigations are being carried out to assess the fiscal effects that have not yet been completed,” said a spokeswoman for the finance ministry.

Previous reports are confident that Germany will in principle be one of the winners. If US corporations are also included, the OECD expects additional income for high-tax countries of three to four percent – globally between 60 and 100 billion dollars per year or four percent of corporate tax revenue. “Germany would almost certainly see an increase in revenue,” says Florian Neumeier, head of the tax and financial policy research group at the Ifo Institute in Munich, “because a large part of the foreign profits of German companies are not taxed in this country.” If corporations abroad were taxed below the minimum rate, the German tax authorities would be entitled to the difference.

Germany would also benefit from a second pillar of the OECD reform – despite the fact that its companies are export-heavy. It plans to redistribute tax revenues from certain multinational corporations based on their sales in a so-called market country. This also breaks with the current principle of taxation at the company’s headquarters, because it focuses primarily on digital business models “with considerable economic activity” but “little physical presence”. For example, Amazon would have to pay corporate income tax to be determined in the respective markets on part of its profits. However, an Ifo report only estimates the effect on the tax authorities at up to 1 billion euros per year, according to Neumeier.

Extent of profit shifting

The amount that countries are missing through tax avoidance is anything but trivial. A new study by the International Center for Tax and Development at the British Institute of Development Studies shows corporate profits of around 1 trillion dollars, which are deprived of appropriate taxation through loopholes in the global system. This is a value from 2016, for which the authors extrapolated data on economic activities that were first submitted anonymously to the OECD by multinational corporations in what is known as Country by Country Reporting (CbC). The data from around a dozen countries were published by the OECD 2020.

Derived from this, the study calculates worldwide tax losses of 200 to 300 billion dollars annually. The OECD has so far estimated about 100 to 240 billion dollars, the organization Tax Justice Network recently calculated 245 billion dollars, with 1.38 trillion shifted profits. The study now identifies companies based in the USA and Bermuda as beneficiaries of the most “aggressive” tax arrangements. On the other hand, corporations in the emerging markets of India, China, Mexico and South Africa were least aggressive. The greatest concentration of shifted profits can be found in the Cayman Islands, Luxembourg, the Netherlands, Switzerland, Singapore, Bermuda and Puerto Rico.

The study does not make any clearer how intensively German or local subsidiaries of foreign corporations shift profits to low-tax countries. While the German reporting is not yet available, it projects a huge 45 to 66 percent that was lost in taxes. The Munich Ifo Institute came to a far more conservative result in a study in January: According to this, only nine percent of the profits of large German companies come from subsidiaries in low-tax countries such as Switzerland or Ireland. Including foreign corporate branches, the tax authorities lost 5.7 billion euros annually through profit shifting.

What will happen to the digital tax?

A comparison by the Tax Justice Network shows that estimates differ widely, according to which a reform based on the global minimum tax of 21 percent, as proposed by President Biden, would bring as much as $ 540 billion into the coffers of states. The five biggest beneficiaries would be the US (166 billion), China (64.4), Japan (59.7), Germany (39.4) and France (25.8). 75 percent of the additional volume would benefit OECD countries.

As for Amazon, another NGO, the Fair Tax Foundation, calculated that the company should have effectively paid only 12.7 percent corporate tax over the past ten years. The six major US digital companies Amazon, Facebook, Google, Netflix, Apple and Microsoft alone are suspected of having avoided $ 100 billion in taxes over the past decade.

How Europe will continue to pursue the digital tax project, for which the EU Commission is due to present a proposal in June, seems open again in view of the progress made on the minimum tax. The Federal Government “is committed to ensuring that the planned EU digital levy is procedurally and content-wise coordinated with the results of the two-pillar project,” said the Ministry of Finance. Further decisions on the OECD reform are to be made at the end of June and in July at the G20 finance ministers in Venice.

This text first appeared at “Capital”.