Talking Tax in Shanghai

In Shanghai, Wolfgang Schäuble is urging his fellow G20 countries to put new rules to tackle tax avoidance into law. Back home, business leaders worry that German companies could be left exposed by the new rules if they are introduced unilaterally or go too far.

The finance ministers of the largest industrialized countries and emerging economies, the G20, along with those countries’ central bankers have gathered in the Chinese city of Shanghai. And while the Chinese economy, the global economic doldrums and the role of central banks in stimulating economies were the main issues up for discussion on Friday, taxation, and specifically efforts to shut down tax avoidance by big corporations, is also high on their agenda during the two-day meeting.

When it comes to tackling the way multinationals are able to dodge paying tax, Germany’s finance minister, Wolfgang Schäuble, is likely to be admonishing his counterparts with one of his mottos: “It’s the implementation, stupid.”

The G20 nations adopted international rules last year which would allow them to jointly take action against the practices of shifting profits and tax dumping by international corporations – the so-called BEPS project, which stands for “base erosion and profit shifting.”

The project, which aims at closing various tax loopholes and increasing transparency, was initiated by Mr. Schäuble and his British counterpart, Chancellor of the Exchequer George Osborne. Mr. Schäuble himself has been ambitious when it comes to implementation, and he hopes to present the national BEPS implementation law to the German cabinet as soon as this May. “Country-by-country reporting will be the most important point,” said officials with his ministry.

This rule is expected to provide transparency: International corporations must report their sales figures, number of employees and taxes paid in individual countries to the tax authorities in the country where they have their headquarters. In Germany, the Federal Central Tax Office forwards these figures to the authorities in all countries where the corporation is active, provided they also implement the BEPS rules.

It is precisely this transparency that is encountering opposition, however. “The international harmonization of corporate tax law that has been introduced must be achieved with a sense of proportion,” said Wolfgang Steiger, general secretary of the Economic Council, a business organization with close ties to Mr. Schäuble’s conservative Christian Democrats. “Under no circumstances may the competitiveness of German companies be compromised,” Mr. Steiger said.

The Federal of German Industry, the BDI, has also voiced concerns. It fears that in emerging markets like India and China, the information could be use to demand a larger slice of the corporation’s tax pie. The German treasury will likely get the short end of the stick, BDI tax expert Berthold Welling, argues.

The Economic Council has drafted a 35-page position paper, which Handelsblatt has obtained. It contains recommendations on the BEPS implementation, both as pertains to German and European law. The heads of the tax departments of many corporations, from Deutsche Bank to Daimler to Siemens, contributed to the document.

It initially states that business leaders expressly welcome the BEPS action plan. However, it continues, a “non-reflective or one-sided application of the results to German tax law is not desirable.” The Economic Council task force wants the G20 measures to be viewed as an “uppermost limit.” “If it were exceeded, the consequence would be double taxation, which is harmful to the economy,” the document reads.

Corporate representatives are especially alarmed, because the European Commission is developing plans to issue stronger rules against tax dumping than the BEPS ones and to publish the results of the country-by-country reporting. Germany will not agree to that, said officials in Mr. Schäuble’s ministry, who added: “We are interested in the one-to-one implementation of BEPS.”

According to the German finance ministry, international corporate tax rules provide corporations with more legal certainty than a world in which every country decides what it wants. BEPS also commits the emerging economies to these rules, Mr. Schäuble’s officials stressed, noting that this is a benefit in itself. Whether this affects German tax revenues is difficult to assess, they added.