ifo: Researchers Warn of International Tax Conflicts through Digitalization and Globalization

With Europe falling behind in the development of digital platforms, the report says, more and more countries are resorting to the unilateral introduction of digital taxes. The US regards this as a violation of international taxation rules and is threatening retaliation in the form of punitive tariffs. This conflict has the potential to disrupt international trade and capital movements, with economic disadvantages for all countries involved.

“Taxation of multinational companies, including digital companies, is certainly in need of reform,” the researchers write. A situation in which companies are taxed very differently and some companies are able to avoid a portion of the tax on their profits is unfair and economically harmful. “There is considerable need for action here.”

There is also a lack of transparency regarding the distribution of taxable profits of multinational companies among the countries they are active in. The data collected through country reporting would make it possible to greatly improve the information base. At present, however, this data is not available in a sufficiently standardized form; a uniform standard is therefore necessary.

However, plans in the EU to release this data as it pertains to EU companies are counterproductive, the researchers add: “We strongly advise against this. In its current state, the data would lead only to misinterpretation and false conclusions.” Without global coordination, publishing this data would put European companies at a competitive disadvantage. Instead, the data should be made available in an anonymized form for analysis purposes. The researchers propose that the EU produce an annual report on the distribution of taxable profits and economic activities of European corporations.
Proposals for the redistribution of taxation rights currently being discussed within the OECD are “unnecessarily complex,” the researchers note. Such complexity risks creating new opportunities for tax avoidance and inciting new conflicts between countries over taxation rights.

Regarding national tax policy, increasing mobility makes redistributive taxation difficult. It would still be possible to retain progressive elements in taxation, but room for maneuver would be reduced, especially for high incomes. This is why many countries have reduced their top income tax rates.

On the expenditure side, the researchers argue for rethinking subsidies for higher education, study grants, and partially or fully subsidized fees. “Such a policy is rather regressive. Private returns on an academic education are comparatively high, which rewards students in two ways: cheaper access to a university education and higher lifetime income.” While there are important arguments for subsidizing primary and secondary education, these are less compelling for higher education. One possibility would be to replace loans guaranteed by the state with study grants.

The researchers emphasize that, in view of the growing mobility of capital and people, less mobile or immobile assessment bases (such as consumption and land) will become more attractive. Surprisingly, most EU countries make little use of taxes on land. Inheritances or gifts are part of a fair tax system, since receiving an inheritance increases the heir’s economic capacity. It is important to dismantle derogations and exemptions in order to reduce unfair discrimination. At the same time, when structuring inheritance taxes and property-related taxes in general, it should be borne in mind that they can trigger capital flight.

Publication

EEAG Report on the European Economy 2020: Fair Taxation in a Mobile World

Andersen, Torben M. / Bertola, Giuseppe / Fuest, Clemens / García-Peñalosa, Cecilia  / James, Harold / Sturm, Jan-Egbert / Uroševic, Branko
CESifo Group Munich, Munich, 2020
01-113