The legal practice of large international corporations (such as Amazon, Apple, Facebook, Google) to circumvent de facto taxation by cleverly designing taxes by exploiting interstate loopholes in tax law met with general public criticism. This was seen as a distortion of the principle of equality of all taxpayers, which could not be accepted even at political level. The consequence was a political process in which many states both inside and outside the EU participated in order to plug such tax loopholes. For this purpose, the EU developed the CCCTB Directive on the approximation of corporate tax.
Germany has played an important part in this process with its previous experience in defending against such tax avoidance measures. These experiences are based on a lengthy development in German tax law. A look at this historical dimension is therefore a good starting point for discussing current and future tax developments within the EU.
In particular, the project to standardize the corporate tax base across the EU is worth a detailed examination. The scope of such a tax approximation by the individual Member States is extremely considerable, since the sovereign regulation of tax law is a substantial feature of each nation state. So if the governments of the EU member states discuss this and possibly even decide unanimously to coordinate with each other on these hitherto purely national concerns, this can be described as extraordinary. But it also indirectly shows the scale of the causal tax avoidance practice that triggered this remarkable process.
1st introduction
In recent years, the topic of tax design models has become increasingly the focus of public attention. The tax evasion facts of prominent Germans have not only aroused the interest of the media public, but also established a social discourse about tax honesty. Another direct consequence of these incidents was the acquisition by the German state of several data carriers, which contained information about financial activities of Germans abroad, as well as the accompanying increase in tax self-disclosure at German tax offices. The political response to this problem was the creation of an international automatic exchange of information in tax matters[2], which should gradually lead to more fairness and transparency from 2017.[3] With this treaty, tax evasion had been definitively and publicly declared a criminal offense by a “cause [sin]”. The public was henceforth sensitized to this issue and reacted both astonished and outraged when the first tax design models of US companies appeared in Europe. Precisely because the planned tax design models were legally legal, people perceived them as fiscal inequality. The legislature was called upon to reform international corporate taxation and to uphold the principle of equal tax treatment.
In 2016, the EU presented a draft directive for a common consolidated corporate tax base that aims to eliminate or at least mitigate the problem of aggressive tax structuring and profit shifting at company level. This work is dedicated to the design of this project and the associated impact of the draft directive on German corporate tax legislation. In addition to the question of whether the legal changes contained in the directive are sufficient to actively prevent intra-European tax planning and profit shifting, the political acceptance of the planned draft by the individual nation states will be discussed here. In addition to the tax harmonisation of the corporate tax base, the EU draft also provides for the harmonisation of the consolidation procedure. The corporate tax is to be assessed once for companies with permanent establishments in several EU countries and then distributed according to a decomposition factor among the individual countries concerned. As this proposal interferes strongly with national fiscal sovereignty, the question is inevitably whether this proposal is politically feasible.
In its oft-repeated formulation, the ECJ described European tax law diplomatically as meaning that ‘while the field of direct taxation as such does not fall within the competence of the Community in the current state of Community law, the Member States must exercise the remaining powers while respecting Community law’. ‘[5] In this way, the judges characterise the current state of European tax law, especially in the area of direct taxation. At the same time, however, this finding also reflects the politically changing relationship between the EU states and the Union, which has always been characterized by the desire for European integration while at the same time fearing the abandonment of national sovereignty rights. [] 6]
The mistrust of individual states at the end of the Second World War was still great among themselves, which gives rise to the fear of surrendering sovereignty rights. [7] However, the old[8] vague idea was readily taken up by the “United States of Europe”[9], especially since in the post-war period there was the necessary willingness to give up sovereignty rights in favor of a European peace and to jointly exercise them.[10] The project, which started as the European Coal and Steel Community (Coal and Steel Union) on 18 April 1951[11] in Paris by the six founding members[12] and was launched on 23 April 1951. Finally, in July 1952, it expanded rapidly in terms of both the areas of cooperation[13] and the states involved. [] 14]
2.2. The founding treaties of the later EU
Finding compromises and seeking and exploring a political consensus are still part and feature of the EU today, as the discussions about more European competences constantly prove. The basic treaty of the later EU is the Treaties of Rome of 1957, which for the first time provided for the goal of a common European market with freedom of services, capital, goods and labour. [16] With the Treaty of Maastricht 1992[17], the formal founding act of the European Union took place, which later found its institutional foundation in the Treaties of Amsterdam (1999)[18] and Nice (2003).[19] "In order to increase the EU's ability to act internally and externally, to strengthen democratic legitimacy and more generally to improve the efficiency of EU action"[21], a 'Treaty on the Constitution of the EU', the Treaty of Lisbon (2007), was created on the basis of the three Treaties.[22] The insight of the political actors that only a “unification of Europe could draw a line under the history of wars and bloodshed, suffering and destruction”[23] formed the spiritual foundation of political union.[24]
In order to legally fix this mental attitude, the member states created binding legal sources through their actions, which regulated the working methods as well as the political tasks and competences of the EU. [25] Written source of law is primarily primary EU law[26], which denotes the right created directly by the members. [27] It includes objectives and regulations on the organisation and functioning of the EU.[28] In fact, it shows the constitutional framework of the Union, which it has to fill administratively and legislatively.[29] Primary EU law includes the Treaties of the European Union, including amending and supplementing clauses and the Accession Treaties.[30] The law created by the EU institutions on the basis of these founding treaties is called secondary Union law. [31] This includes legal acts with and without legal character, non-binding legal acts and legal acts that are not legal acts.[32] The definition of secondary law alone makes it clear that this is a constantly ongoing process of legal generation that “fills the Treaties of the Union [...] with life and over time implements and completes the European legal order”. ‘[33] The final written source of law is international agreements with third countries in a wide variety of fields, including association agreements (Article 217 TFEU), cooperation agreements (Article 218 TFEU) and trade agreements (Article 218 TFEU)[34].
2.3. European tax law
Despite the European single market and the introduction of a common currency[35] in the field of European economic and financial policy, “the first important thing is to realize that the EU is not a tax union.” ‘[36] The foundations of European tax law lie rather in the Treaty on the Functioning of the European Union (TFEU),[37] but only rudimentary regulations are fixed there. “The FEU Treaty and the EU Treaty lack a uniform codified tax law”[38], but rather the tax laws of the member states are on an equal footing.[39] In the absence of a comprehensive basis for authorisation, no harmonisation in the area of direct[40] taxes has been carried out so far, so that 28 non-uniform corporate taxation regulations coexist. [41] Because in kind. 2 TFEU, the EU is only entitled to regulate situations expressly assigned to it.[42] This situation is given in the case of indirect[43] taxes.[44] According to Art. 113 TFEU empowers the EU to harmonise the rules on VAT, excise duties and other indirect taxes, without which a functioning internal market that is not distorted by competition is unthinkable. [45] Legally, the EU achieved this through several directives under Art. 288(3) TFEU. In the field of VAT, the VAT System Directive (VATSystRL) has therefore been referring to full harmonisation since 2007, as there is uniformity in taxable and tax-free supplies and services as well as in the deduction of input tax. [46] Only the tax rates are still subject to the individual national tariff.[47]
The area of direct taxation, on the other hand, is characterised by the principle of limited individual authorisation by type. 5 par. 1 and 2 of the Treaty on European Union (TEU) and the principle of subsidiarity, which is thus closely related[48] (Article 5(3) TEU).[49] The delegation states that the EU does not have a comprehensive legislative competence and that, in accordance with the TFEU, this legislative competence must be explicitly assigned to it.[50] However, this is vacant for the area of direct taxes in the Treaty of the TFEU or the TEU. [] 51]
2.4. Non-discrimination
The principle of subsidiarity emphasizes, in recent opinion of the tax literature, the competition between the 28 tax systems of the Member States. [52] The EU becomes art. 115 TFEU empowers the adoption of harmonised laws, regulations and administrative provisions which ensure the functioning of the common market or have a direct effect on its establishment. [53] “The nonetheless strong influence of European law on national tax law is rather based on the case law of the European Court of Justice,” explains Heike Jochum, because “the court enforces with great stringency the prohibitions of discrimination under European law against the national tax law systems.” ‘[54] These concern the four fundamental freedoms of the internal market in the form of the free movement of goods, the freedom to provide services, the freedom of movement of persons and capital.[55] Only in cases of an overriding general interest is a violation of these four fundamental freedoms permitted after strict scrutiny, but this explicitly does not include the fiscal interest of the individual states. [56] Since jurisprudence has long regarded itself as the “guardian of the prohibitions of discrimination”, Jochum describes the ECJ as the “engine of tax law in Europe”[57]. Florian Haase also speaks of a “factual harmonization in terms of ECJ jurisdiction”[58], the effects of which are manifested both in short-term administrative difficulties resulting from the ECJ rulings and in a very low level of legal certainty for taxpayers, since “the decisions that often go deep into the national tax system ... challenge defensive reactions of the financial administration in the short term”.[59] Above all, in order to harmonize the area of direct taxes, Haase said, only the establishment of basic decisions by the ECJ is not the appropriate means.[60]
The question of the lack of willingness of member states to harmonize corporate taxation is to be examined in the following chapter. In an outline of the history of the German corporate tax, the foundations, intentions and problems that led to the status quo are to be shown historically.
3. Corporate tax in Germany – a historical consideration
3.1. Preforms
The origin of corporate tax and its pre-forms reaches into the beginning of the 19th century. century back.[61] Until this time, personal taxes were predominant on the territory of Germany as well as in most other European countries.[63] This type of tax collection was, not least, the expression of an administrative system which was still in its infancy and whose limited capacity was accompanied by a less demanding form of taxation. [64] Because of the very simple tax base, people felt this form of taxation was socially unfair. An example here is the poll tax,[65] which, on the one hand, exempted nobility and clergy from taxation and, on the other hand, made no distinction between the assets of taxpayers.[66] It was only through the distinction between tax subject[67] and tax object[68] and the combination of the tax base with objectively measurable criteria, such as assets or income[69], that it was possible to ensure more equal and fairer taxation. [70]
3.1.1. Prussian Trade Tax Edict 1810
The beginning of this development was marked by the Prussian trade tax edict of 1810[71], which on the one hand combined the previously proclaimed trade freedom[72] with a new tax and on the other hand took into account the industrial change, in the course of which industry increasingly displaced the dominant, classical agriculture.[73] Taxable for this "business permit tax"[74] and the later trade tax[75] were all those who fulfilled the descriptions of activities described in the law. [76] This included all those whose self-employment was aimed at generating income, including the liberal professions.[77] The use of external parameters, such as the number of employees and the number of machines, as a benchmark resulted in the State taxing not the actual turnover or profit but the presumed capacity of the establishment. [] 78]
3.1.2. Prussian Trade Tax Act
The criticism of the potential capacity taxation and the fact that the tax revenue obtained from it was very low led to an immediate replacement of the tax by the Prussian Trade Tax Act of 1820.[79] The new law, however, only partially remedied, since the tax legislature narrowed the taxpayers so that the liberal professions were excluded, but he maintained the feature taxation from the previous law. [80] Since the tax assessment was carried out on the basis of activity characteristics and the determination of the performance of companies on the basis of presumed economic strength, the lack of separation of income and value taxation (substance) soon revealed an undertaxation of large enterprises and an overtaxation of small enterprises. [81] “As a result, the 1820 Trade Tax Act was not very suitable for adapting to the dynamics of economic development and the growing financial needs of the public sector” [82], sums up Potthast.
3.1.3. Share companies as drivers of subjectivation
In response to the above-described material shortcomings of the law as well as the dynamic development of the economy settled from mid-19. In the 19th century, in Prussia, a new development with regard to taxation slowly developed: the subjectivation of tax liability on the basis of certain forms of organization. [83] This necessitated, on the one hand, the increased establishment of public limited companies[84] and, on the other hand, the emergence of new industries, such as railway companies. [85] These accounted for high annual deficits in the first years of foundation and very high annual surpluses in the later saturation phase. [86] However, the State of Prussia taxed these companies on the basis of characteristic taxation, i.e. on the basis of their theoretical capacity. [87] Consequently, the railway companies were subject to a constant annual trade tax burden, which did not take into account the real economic development of the company during the product cycles, nor did it allow the initial losses to be carried forward into later years. [88] The state initially reacted by suspending the business tax on this circumstance, as it had a political and economic interest in the new technology. [] 89
3.1.4. Business Tax Act 1853
In a second step, he led on the 30. In May 1853, a modified trade tax law was introduced, which applied to railway companies in the legal form of the public limited company.[90] "The beginning of a modern corporate tax was made with it"[91], notes Potthast, especially since the income after deduction of administrative, maintenance and operating costs was considered as the taxable basis.[92] The legislature thus abandoned the system of external feature taxation in favour of a corporate income tax assessment and applied it formally to all public limited companies and limited partnerships on shares four years later.[93] In order to better distinguish from the general business tax, the term share tax was used in the language.[94] Although the law in 1867 subjected all railway companies, regardless of their legal form, to the new tax, the legislature always emphasized that this regulation did not create a new tax, but only a special form of business tax.[95] The share tax and also the special business taxes for railway companies declared, in accordance with civil law, the joint stock companies as independent tax entities and taxed their distributed profits at the recipient. [] 96
3.1.5. Prussian Municipal Tax Reform of 1885
New tax trends were then to be observed in the field of municipal taxes and should soon also be applied at the level of corporate taxation. The Prussian municipal tax reform of 1885[97] integrated the (replacement) trade tax[98] into the income tax. In this way, the tax equality of natural and legal persons took place, since the municipalities saw in the companies only the embodiment of the natural persons behind it.[99] From the special income taxes[100] of previous years, a special income tax or It became an early form of income corporation tax, which recorded all conceivable income, regardless of the source of income, using formal criteria. [101]
3.2. The financial reforms from the German Empire to the Nazi period
3.2.1. The financial reform of Miquel
Johannes von Miquel revisited the above-described progress at the municipal level in his new conception of Prussian tax law.[103] In addition to the feature taxation still practised in trade tax, but felt to be unfair and unequal, political and, above all, financial obligations were decisive for reforming taxes.[104] The obligations of the Reich resulted mainly from the politically motivated introduction of social security and the increase in the army, both of which exhausted the previous tax revenues.[106] The core element of the concept, which later became known as Miquel's tax reform, was the Income Tax Act of 1891 and the Business Tax Act of 1891.[109] The Trade Tax Act modified both the content, by abolishing feature taxation and introducing a more suitable tax base based on annual income. The amount of working and fixed capital, as well as the previously applicable law on revenues.[110] However, the newly created Income Tax Act had more decisive effects for corporate taxation, which included numerous regulations for natural and legal persons and made them completely equal in the sense of income tax law.[111] Only in the determination of income were there differences.[112] According to the source theory[113], the income of natural persons was determined as a surplus of the revenue over the tax-determined deductions, while that of legal persons used the operating surpluses including the increases in the value of assets according to the net asset access theory[114].[115] The legislature emphasized with the integration of corporation tax into income tax that both natural and legal persons can generate income.[117] Both the designation of corporation tax as “income tax of legal persons”[118] as well as the material references in today’s corporate tax law to the EStG, such as in § 8 KStG, remind according to Potthast of this proximity.[119] After the preforms of corporation tax were first to compensate deficits of business tax, the income corporation tax now served as a supplement to income tax in order to be able to tax thesaurated profits that were not covered by income tax. “[120] Since Miquel and his predecessors saw corporate tax as a substitute for income tax, they did not develop its tax base as consistently and systematically as that of income tax, so that soon the problem of double burden or double taxation appeared as a result.”[122]
In the opinion of the author, the controversy over the double tax burden can ultimately be reduced to the question of whether corporations, by analogy with their civil status, are also regarded as independent entities under tax law, or whether they can only be regarded as economic vehicles of shareholders for income generation. The latter view was held, for example, by Dietzel[123] in the so-called identity theory. In its opinion, a corporation is to be regarded only as a legal vehicle of the shareholders who use it for income. Accordingly, the operating assets in the form of the corporation do not constitute separate assets of the corporation, but rather are only an embodiment of the shareholder’s assets. At the same time, it is an expression of the economic and fiscal capacity of the shareholders. The civil classification of the corporation as a legal person is tax irrelevant for Dietzel. A counterposition to the theory of identity took the theory of the company itself[124]. It stressed the civil autonomy of the legal person also in tax matters and refused a direct allocation of the company assets to individual shareholders. On the basis of these assumptions, the theory of the company in itself concluded that the taxableness of the corporation was in principle given. Although this line of thought is immanent for the later introduction of corporate tax,[125] it also brought with it the problem of the double burden for the shareholders. Increasing income tax rates increased increasingly and led to criticism of the position of corporate tax in the overall tax system.[126] The critics wanted to solve the problem of the double burden by resorting to Dietzel’s theory of identity and taxing all income from the shareholder in the income tax. The proponents of the approach of the theory of the enterprise per se justified direct corporate taxation by arguing that non-taxation of accrued profits at the level of corporations was accompanied by a strong willingness to build up large capital reserves.[127] This entails the risk of tax avoidance, which the state could have no interest in.[128] As a further argument, they cited the advantages of withholding taxation, which ensures domestic taxation with regard to the recording of the revenues of foreign shareholders in domestic corporations[129].[130] The proponents of corporate taxation ultimately prevailed because the state did not want and could not do without the revenue generated by the corporate tax.[131] In order not to reduce entrepreneurial activity by overtaxation, the individual German states[132] reduced the double burden by improving coordination between the respective income and corporate tax laws. Historically, this has led to the development of various accounting systems[133] at country level, the basic mechanisms of which are described in more detail. Until the new version of the Reichssteuersystem after the First World War, numerous credit systems existed in the German states side by side, which were not coordinated with each other. [134]
3.2.2. The situation of the tax system after the First World War
Reparation demands, debt servicing, reconstruction costs and social burdens as well as very high inflation were the direct fiscal effects of the lost First World War on the German Reich.[135] Since taxes and tax revenues could only cover 6% of government expenditure in the last two years of the war, the framework conditions were set for a new, better and more efficient tax system, which should in particular generate higher revenues.[136] The stabilization of state finances and the creation of an efficient tax system could only be achieved by shifting tax sovereignty from the Länder to the Reich,[137] especially since the subsequent costs of the war were also located in the Reich. [138]
3.2.3. The Financial Reform of Matthias Erzberger
Matthias Erzberger, Vice-Chancellor and Reich Minister of Finance, was the leading head behind the Reichsfinanzreform, which aimed at increasing the tax revenue, regulating the financial equilibrium between the Reich, the provinces and the municipalities, reorganizing the financial administration and reorganizing the tax collection procedure.[140] After the expanded legislative competence had been transferred to the Reich at the expense of the Länder on 11 August 1919 with the Weimar Constitution, fourteen new individual laws were passed between September 1919 and March 1920 under the leadership of Erzberger. [141]
3.2.4. The Dualistic Tax System
The newly created Income Tax Act[142] and Corporate Income Tax Act[143] replaced the numerous similar individual laws at the state level and formed the basis of the direct personnel taxation of the Reich.[144] With the formal separation of the income tax for natural persons from the corporation tax for legal persons and other economic legal entities, the emancipation of corporation tax from the field of business and income tax was completed.[145] "Corporation tax had abandoned its character as a mere supplementary tax"[146]. Instead of the exemplary list of taxable entities in the preceding laws, there was now an abstract reference to corporate structures[147], which is still today characteristic of a modern corporate tax[148].[149] Due to the competition of legal and natural persons in economic life and the fact that corporations could assert advantages in raising capital[150] over individual and partnerships, the legislature insisted on a tax equal treatment of corporate forms. Since natural persons were subject to income tax, corporations should also be taxed. [151] In order to emphasise the character of equal taxation, the KStG[152] referred to the definitions of the EStG in the concept of income.[153] Although the segregation of legal and natural persons was not really a new achievement in tax law, it was ultimately based on civil law, but it established two new aspects that are still part of modern taxation today: the principle of segregation[154] made it possible to conclude contracts between companies and shareholders, which were also effective in tax law, and in this way distinguished the companies from the individual companies and the partnerships, which were taxed according to the principle of penetration or transparency[155]. [156] The dualistic tax system was well founded.[157]
3.2.5. New concept of income – profit savings
Building on this, the Income Tax Act of 1925[158] produced a new conception of the concept of income, which provided for a final breakdown of income into eight different types of income in accordance with § 6 EStG 1920.[159] These were designed as both surplus and profit income types, so that the legislature here followed elements of both source and net asset access theory.[160] With this clarification of the income tax, a new level of dualism between KStG and EStG was reached, which influenced the choice of legal form.[161] The taxpayers "recognized the tax burden differentials in economically identical situations"[162] and took advantage of the tax saving effect between 20% corporate tax rate and 40% peak income tax rate in 1925 for profit taxation. Due to the tariff increases in income tax until the 1933s, the legislature was asked to ensure by corrections that “tax norms that were intended without any steering norm [...] did not produce different economic effects”. “[164]” A spread[165] of the income tax rate and the task of dividend taxation were the chosen means to achieve the goal. [166]
3.2.6. Period of the Nazi dictatorship
The period of National Socialist rule in Germany is characterized in tax and corporate tax law mainly by tariff increases[167] due to an increased financial requirement by military armament.[168] Etymologically, it should be emphasized that with the task of distinguishing between acquisition companies and other corporations in the KStG 1934[169], the concept of capital companies is found there for the first time. [170]
3.3. development after 1945
3.3.1. The post-war period until 1969
After World War II, the legislature in West Germany adhered fundamentally to the already classic corporate tax system.[171] A feature of the immediate post-war period were extremely high tax rates with a peak income tax rate[172] in 1948 of 95%.[173] The state needed money for reconstruction, wanted to reduce inflation risks by siphoning off superfluous purchasing power and strengthen the financing of companies by providing incentives for the acidification.[174] With the lowering of tax rates from the mid-1955s, the legislature went on to eliminate the undesirable side effects in the area of the interaction between the EStG and the KStG. In the "small" tax reform of 1953, he relieved shareholders at company level by introducing the split tax rate.[178] This tax relief marked the departure from the classic corporate tax system towards a system with partial relief[179].
Further tax relief brought about the amendment of the KStG 1969[180] in the form of the corporate tax body[181], however, all corrective measures initiated by the legislature were not able to solve the tax problems in a satisfactory manner.[182] This included the lack of legal form neutrality[183] of corporate taxation, the favoring of foreign shareholders[184] and the influencing of corporate financing.[185] Only with the political change of power in 1969[186] was there a willingness to fundamentally reform the existing system.[187] After setting up a specialist commission[188] and five years of political deliberation, the German Bundestag adopted the Corporate Tax Reform Act in 1976[189], which came into force on January 1, 1977.[190] "The tax reform of 1977 can easily be placed on a par with ... the Miquelian tax reform 1891/93 and the Erzbergian financial reform in 1920."[191] The Corporate Income Tax Reform Act replaced the previous split Corporate Income Tax Tariff with the crediting procedure.[192] However, the implementation of this procedure was complicated and opened up in some passages “even the specialists among corporate tax lawyers only in happy hours”[193]. There was no denying the tax progress that the changeover brought. With the alignment of the proportional corporate tax rate to the top income tax rate, the legal form neutrality vis-à-vis partnerships was maintained.[195] Furthermore, the distributed profits were subject only to a tax rate of 36% that could be counted in the income tax of the shareholders.[196] One consequence of the crediting process was the abolition of the so-called box privilege[197], since the crediting of distributions for both natural and legal persons was part of the tax system.[198]
3.3.2. Corporate taxes in 1990s Europe
In the 1990s, the competition dimension of corporate taxation became more relevant. The taxes payable in the respective state were part of the company’s operating cost calculation and sometimes determined where parts of the company were established. A favourable factor for this development was the desired tax competition in the EU[199] between the individual member states, which led to tariff reductions[200] in the area of corporate taxes. A fundamental problem for the German tax state was the non-EU conformity of the accounting system[201] in the KStG and the only moderately pronounced competitiveness of the existing system. As a consequence, in 2000 Parliament passed the Tax Cutting Act[202], which provided for a move away from the accounting system in favour of a partial relief system. The proportional corporate tax rate could thus be reduced to a uniform 25%. In addition, dividend income was only half taxable. The problems of this system lay in the lack of legal form neutrality and in the aspect of profit distribution, as it privileged thesaurations and disadvantaged distributions for tax purposes.
3.3.3. Corporate tax reform 2008
The corporate tax reform of 2008[204] aimed to increase the attractiveness of Germany as a location for investors and foreign companies by lowering the corporate tax burden. The corporate tax rate fell to 15%.[205] Significant tax changes affected the level of shareholders, at which taxation is henceforth linked to whether the participation is part of the private or business assets.[206] If the former is the case, the dividends are subject to the special tariff (capital gains tax) pursuant to § 32d para. 1 EStG in the amount of 25% plus solidarity surcharge and, if applicable, church tax.[208] Due to the compensatory nature of the capital gains tax, the advertising cost deduction is excluded, only the savings lump sum according to § 20 para. 9 pages 1 and 2 EStG is deductible.[209] If the participation is in the company assets of the shareholder, the partial income procedure takes effect with a tax-free share of 40%.[210] Barth therefore considers that the corporate tax reform of 2008 has shifted the burden effect from the company to the shareholder level.[211] He still doubts whether the desired goal of making Germany more attractive as a competitive location is achievable with the measures taken.[212] “In view of the brisk international tax competition, however, it is to be feared that Germany will be caught up and overtaken by its competitors.”[213]
Global companies and national income tax legislation
4.1. The corporate tax systems of the EU member states
In a globalized world economy, the competitive idea has become part of economic thinking and action.[214] Not only globally active large corporations carry out their enterprises according to this maxim, but also the classical medium-sized companies are now globally organized organizationally, in terms of production and personnel.[215] Globalisation makes the world smaller, international competition tougher and the chances to gain advantages in the market through targeted positioning. Companies are able to leverage synergies by relocating production or by changing their corporate structure, which were previously considered to be given and irrevocable fixed costs. In this context, the taxation of companies and their goods and services must be seen in a transnational and international context. Because the mobility of capital, wealth and taxpayers themselves has never been so pronounced historically as today.[216] States compete in an international tax competition for the economically best and most financially powerful companies and taxpayers.[217] The steadily increasing financial requirements of the states and the tax and economic race that they have pushed have led to the field of corporate taxation increasingly being used as a vehicle for economic policy.
An impression of the international tax competition as well as of the German position in this competition is given by the evaluation “The most important taxes in international comparison”[219] published by the Federal Ministry of Finance, which the author has analyzed and evaluated.
According to the BMF preface, the processed data should serve as a basis for tax and financial policy discussions. As a data base, the Information Center for Taxation at home and abroad in the Federal Central Office for Taxation used the tax rates of all 28 EU member states and some selected industrial nations from 2015.[221] According to the explanations on the tax and duty rates in an international comparison, this evaluation is devoted to the tax burden on the profits of corporations.[222] Compared with the corporation tax rates in 2015, which was adjusted for the surcharges and taxes of subordinated local authorities[223], the Federal Republic of Germany with 15% tax rate is in the upper, favorable range, which is grouped according to the burden level.[224] The top place with 8.5% is Switzerland ahead of the EU member states Bulgaria, Ireland and Cyprus. Germany succeeds in fifth place together with three other states. The tail light with a burden of 35% is the USA and Malta. After the inclusion of business income taxes and comparable other taxes of the central government and local authorities, the picture changes fundamentally. While Bulgaria (10%) as well as Ireland and Cyprus (12.5% each) continue to occupy the top positions, Germany, with an overall burden of 29.83%, ranks 27th out of 33 countries compared.
The tail light again forms the USA with the reference state New York as the basis for calculation.[225] The previously described ranking is used as a benchmark in the further course of the analysis.[226] However, the significance is limited, since the design of the dualistic corporate tax system has not yet been taken into account.
4.1.1. Different corporate tax schemes
As already explained, there have been numerous efforts in Germany over time to reduce or even overcome the double burden inherent in the interaction between income and corporate tax. Examples are the accounting procedure[228] and the current corporate tax system with partial accounting[229]. Internationally, different (and changing) methods of partially or completely avoiding double taxation have emerged over time. “[230]” Ireland and Switzerland have remained faithful to the classical system of a separate assessment under full double taxation, once at corporate and then at income tax level.[231] This also explains the low corporate tax rate of both countries in an international comparison, since this is again fully taxed at the shareholder level.[232]
4.1.2 Partial accounting and partial relief scheme
The majority of states prefer a partial relief or partial accounting system[233] between the two types of taxes.[234] A partial relief scheme operates at shareholder level with special tax rates, which are intended to reduce the double burden. In Germany, natural persons are granted an approximately complete tax exemption according to § 8b KStG by means of the capital gains tax[235] and legal entities as shareholders.[236] The partial exemption of income from income tax, as for example provided for in the new Investment Tax Act[237], has the same effect. Related to the systematics of partial relief are crediting procedures, as it practiced Germany until 2007. A distinction must be made between the degree of offsetting of the corporate tax burden at shareholder level. While the UK only allows a top-up amount[239] for dividend distribution[240] as an offset against income tax, in Malta the complete distribution profit is eligible for income tax.[241] Estonia and Slovakia, on the other hand, have chosen the easiest way in terms of tax law by exempting the distribution of profits to the shareholder.[242] Hey points out that lowering corporate tax rates is an inevitable response to tax competition.[243] “While originally the need for relief from the corporate tax burden was in the foreground, it now requires ... a shareholder-level recharge in order to achieve a higher income tax burden on other types of income.”[244] "[245]" The result of tax competition is the nominal corporate tax rates, which were almost unchanged as of 2014.[246]
4.1.3. Taxes paid by local authorities
The second distorting factor is the taxes and levies of the central government and local authorities, which are disregarded in the first step. This includes both the German trade tax and other corporate taxes of individual states, provinces, regions and the like, which are partially deductible from the actual corporate tax.[248] Hey emphasizes that the German trade tax has become the "equal corporate tax next to the KSt"[249] at an average rate of 400% for corporations. For this reason, according to the author, both taxes must be considered together.[250] Due to the double burden problem discussed, a meaningful value can only be derived if the tax level of the shareholders is included. However, national tax laws are not so stringently interpreted that a distribution of profits to the shareholder can necessarily only lead to a tax result. Rather, partial and full accounting schemes, special tax rates and tax exemptions, as well as the taxpayer’s voting rights, lead to different outcomes, even though the tax assessment is carried out in the same country.[251] In order to still be able to establish a comparability, the authors of the BMF evaluation determined the maximum amount of the total tax burden and based this on their chart 3. It is thus possible to achieve a lower burden than stated in individual cases, but the indicated tariff represents the maximum amount.[253] The maximum amount calculation presented by the BMF is expedient as a basis for discussion, since it reflects the rule without observing the special regulations.
4.2. The problem of aggressive tax design and tax avoidance
Companies operate internationally, financial administrations locally. "[261]" This rather simple formula reduces the core problem of aggressive or optimizing tax planning[262] and profit shifting, which is legally legal, politically and socially unwanted. [263] When numerous media outlets reported on the extent of tax planning of well-known US companies, public outrage was great, because company sizes such as Google Inc. or Apple Inc. could expect an effective tax burden of less than five percent on their non-American profits with the help of their tax planning models. For many people, the problem was not the low tax rate in itself, but the sense of violation of the basic principle of equal taxation.[266] If at the end of this process the “honest of the stupid”[267], then the integrity of the tax system suffers.[268] The causes of tax planning have both a tax law and a business background. Only through the interaction of both components the field of optimizing control planning emerged, which is now explained in more detail.
4.2.1. Tax background of tax planning
Tax law links the constituent elements of the tax liability of a person or a corporation either to a “personal relationship of a natural person to the taxing State”[269] or to the “spatial relationship of taxable income to another State”[270]. The first mentioned aspect can be found in German tax law in § 1 Abs. 1 EStG again, which provides for unlimited tax liability for all persons who have their domicile[271] or habitual residence[272] in Germany.[273] Similarly, § 1 para. 1 KStG the unlimited tax liability for corporations whose registered office or management is located in Germany.[274] Both unlimited natural and unlimited taxable legal persons are taxed with their world income[275]. If this is due to missing factual features according to § 1 EStG or § 1 KStG is not possible, then the domestic income is subject to the taxation of the state in which it arose. The person or corporation is subject to limited taxation in this state and is assessed there in accordance with the territorial state principle[277] or the withholding tax principle[278].[279] In order to prevent double taxation of the same income by two or more countries in foreign-related situations, states concluded double taxation agreements (DTA)[280] to regulate these situations. The FRG maintains about 90 DBAs with other states.[281] The second essential element of a taxation right is the traditional physical presence of an economic good in the territory of a state. If a company maintains a permanent establishment abroad, then the income generated there is also taxable in the local state[282], unless the DTA regulates the situation differently.
4.2.2. Economic background of tax planning
The value chains of global companies are internationally oriented, very complex and closely interwoven with suppliers and customers. Therefore, it is very difficult to attributable value to a territorially defined area.[283] Digitalization has long since become a growth factor and innovation provider for companies. Part of this process is intangible assets, such as licenses, patents or other rights, whose importance for business and trade should not be underestimated. However, intangible assets are also characterised by the fact that they are mobile and spatially easy to relocate, which in turn makes it difficult to impute the resulting added value.[284] Due to the ever-increasing importance for economic trade, some EU countries have switched to calculating income from the use of patents at a lower than the regular tax rate[285]. [286] Since some countries dispense with a substance requirement[287] of patents for tax advantage, the so-called patent boxes[288] can also be used for patents that were not necessarily developed in this state.[289] As a result, the aggressive tax structure uses the tax construct of the patent box for corporate profit shifting, which further drives tax competition between states. A similar phenomenon are classic low-tax countries, which are often colloquially referred to as ‘tax havens’. Depending on their design and objectives, these states tax-free income from specific incomes up to entire types of income[291] or subject them only to a low tax rate in order to promote foreign investment.[292] Both the use of low-tax countries and the patent boxes purely for tax purposes lead to an artificial separation of profit taxation and the value added underlying profit.[293] While the value added usually takes place in industrialized high-tax countries, the taxation of this profit takes place in low-tax countries.[294]
4.2.3. Control design
For company spin-offs for tax structuring purposes, the tax planning departments of the companies take advantage of the circumstances outlined so far: The problem of the unlimited tax liability of the corporation is quite easy to solve by setting up a foreign company in a suitable state. Then the transfer of intangible assets from the parent company to the operating assets of the foreign subsidiary takes place. However, there is a risk that by converting parts of the company and by relocating assets abroad, national tax law provides for special cases[295] which lead to a tax burden. In order to circumvent such problems, companies with long-term tax planning assign their respective research and development departments to the foreign subsidiary from the outset, so that the added value through the development of the intangible economic asset takes place holistically in a foreign country that is not taxable for the country of residence of the parent company. Subsequent profit shifting then takes place via usage and license fees, which the domestic mother of the foreign daughter must pay. A study by Heckemeyer and Overesch[297] concludes that transfer prices and royalty payments are the dominant profit-shifting channel. Accordingly, they account for about three quarters of the cross-border profit shift. “[298]”
The corporate policy of aggressive tax design not only has direct negative effects on the states affected by the profit shift, but also in other areas that are of great importance for companies in the long term, undesirable developments occur. An economic consequence of this corporate policy is strong distortions of competition between companies themselves. The differential tax burden of profits in the international context on the one hand provides advantages for large corporations with a professionally planned organizational structure[299] compared to smaller companies or medium-sized companies for whom such structures are not efficient.[300] On the other hand, both the location and the associated tax burden as well as the quantitative extent of the realization of profit shifting potentials can create economic advantages, which lead to distortions of competition between otherwise equal companies.[301]
Another key area for companies is their investment and financing decisions. These should, if possible, follow the corporate strategy and not only be justified by tax aspects.[302] Countries that offer too little tax incentives not only suffer from a lack of tax revenue, but also in the long term from the lack of tax substrate[303], which is now located in other countries. A relocation of sources of income and control substrate from home to abroad is also known as an outbound case and that from abroad to home as an inbound case. [304] Both factors have in common that they do not necessarily have to be the result of a tax optimization, but can also be caused by general business operations.[305] The cheapest cases are white income generated in this way, which is not subject to taxation by any state. However, the problem of double taxation is more likely in many cases.[307] The latter has been the guiding principle of numerous unilateral, bilateral, multilateral treaties[308] and parts of supranational law[309], since there is now consensus that "double taxation ultimately does not benefit any of the participating states". “[310] Rather, they are harmful to the national economy, since they entail a misallocation of production factors.”[311] For these reasons, countries concluded DTAs on the model of the OECD[312], which should prevent double taxation and create legal certainty.
However, an administration and jurisdiction governed by international law, European law and constitutional law regulations in turn entails the problem of legal uncertainty, since national authorities and state bodies are increasingly influenced and bound in their actions by contracts with supranational organizations. Eliminating the resulting legal uncertainty is usually a lengthy process, in the course of which opportunities and risks arise for all parties involved. Above all, cross-border situations bring intentional or unwanted[314] difficulties that all parties have to face. For many global companies with branches abroad, such tax issues are relevant for their business activities and decisions. At the same time, companies also like to use imprecise legal passages for (aggressive) tax design.[315] In both cases, a submission to the ECJ or the BVerfG is the obvious legal remedy to be followed in order to minimize the legal risk, since double taxation agreements and national laws do not cover all constituent elements without gaps[316]. For this reason, Haase aptly describes the ECJ as the engine of harmonization in European tax law.[317]
Base Erosion and Profit Shifting (BEPS)
The pre-described tax design implications, as well as research showing that multinational companies have a lower effective tax burden than national companies[318], prompted the OECD and G20[319] to focus intensively on tax planning and profit shifting. At the provisional conclusion of these discussions, the OECD published on 5 October 2015[320] fifteen measures to help prevent BEPS[321] in the future. The acronym BEPS stands for the English term Base Erosion and Profit Shifting, which can be translated as profit reduction and profit shifting. According to estimates[322] by the OECD, the global loss in corporate income tax was between four and ten percent of global corporate income tax revenue, a volume of approximately 100-240 billion. US dollars are equivalent.[323] The German Treasury alone lost between 2.4 billion by profit shifting. Euro (Huizinga/Laeven 2008)[324] and 10 billion. Euro (Finke 2013)[325]. Due to the limited data base for Germany on the totality of cross-border companies, these values can still be classified as methodologically convincing estimates. [326] The magnitude of both values prompted the 20 largest industrialised and emerging economies (G20) under the auspices of the OECD to put this issue on the agenda. This is ‘due to the urgent need to regain the confidence of ordinary citizens in the fairness of the tax system, to create a level playing field for companies and to provide public authorities with more efficient tools to ensure the effectiveness of a sovereign tax policy’ [327], explains the OECD in its comments on BEPS. In order to monitor and further develop this project, the OECD has set up a body called the Inclusive Framework on BEPS, which will coordinate the work and core concerns of developed, emerging and developing countries.
5.1. The Problems That Led to BEPS
The core problem of the OECD countries was the fact that the digitization of the world was progressing rapidly, while the nationally organized tax law systems offered proven and old concepts as countermeasures that were no longer up to the demands of the time.[329] The second component was international and, above all, intra-European tax competition, which led the states to lower tariffs and special regulations, such as the patent box.[330] Both aspects, taken together, favoured and promoted the use of tax structuring mechanisms by companies, but also quickly showed their downside[331] for the states. The extent of the profit shift, especially through aggressive taxation, was classified by the public and also by the individual states as unfair competition, which in the long term jeopardized both the sense of justice of taxation and the important revenues to finance the state community. The “intensification of the fight against abusive or (now) abusive structures” (333) expected the public from their governments. As a result of this development, the aspiration of the leading industrial and emerging countries to counter this with a holistic, fundamental and sustainable approach. As a suitable organization, they selected the OECD, which is considered a "standard setter for the international tax area"[334], as the OECD Model Convention on Double Taxation illustrates.[335]
Already the OECD report[336] of 2013 came to the conclusion that it is not individual tax laws per se, but the interaction of them with each other that favors the BEPS problem.[337] For this reason, the discussions focused mainly on the field of hybrid mismatches[338]: “There are arrangements exploiting differences in the tax treatment of instruments, entities or transfers between two or more countries”[339], is the official definition of the OECD. Different tax assessments of situations by two or more countries have their origin in the lack of harmonisation of tax law. As explained in the preceding section, the consequences of national tax systems in relation to foreign affairs are either double taxation or double non-taxation.[340] While double taxation agreements largely resolve the former case, due to their rarity, double non-taxation was hardly the subject of international or bilateral agreements.[341] Taking advantage of such legal loopholes was henceforth an important instrument for tax-optimizing corporations. In terms of content, the companies aimed, among other things, to create hybrid companies, dual-based companies or hybrid financing instruments. Hybrid companies are companies which are classified for tax purposes by one State as a partnership and for tax purposes by another State as a corporation. “The resulting qualification conflict” as a transparent partnership or as a non-transparent[342] corporation “can lead to tax losses in certain constellations”. ‘[343] The same result is achieved by the issue of dual-resident companies, whose headquarters and management are located in two states. To illustrate the effects of this construction, a brief look at well-known US companies and their foreign subsidiaries will be taken.
5.2. The example of Apple Inc.
For example, Apple Inc. established a hybrid company based in Ireland and managing directors in the United States to manage and exploit intellectual properties (IP). The advantage for Apple was that the US granted Ireland the right to tax on the basis of the company's registered office, while Ireland in turn assumed that no taxation could be carried out there due to a lack of domestic Irish management.[345] This tax structure is the basis of the later publicly known extra-tax structure called “Double Irish – Dutch Sandwich”. In order to be able to generate the licence fees in the most income tax-neutral way possible, the company set up two Irish companies, one acting as the owner of the licences and the other exploiting the rights of use granted to it to third parties. Since a direct transfer of company two’s licence revenue to the owning company would have triggered Irish withholding tax, another intermediary company was set up in the Netherlands to circumvent this problem. While on the one hand the licensing rights were transferred from the first Irish company to the Dutch company and in a further step to the second Irish intermediary company, on the other hand the licensing revenues took the opposite path. In this way, the license revenues of the U.S. companies ended up with the license holding company without any prior tax or withholding tax burden.
Finally, the third variant of hybrid mismatches is the hybrid financing instruments in which a company resident in one state provides financing to a company resident in another state. The tax peculiarity now lies in the fact that one country qualifies this financing as equity capital and the other as debt capital. As a result, the one state that classified the financing as equity sees the payment as a dividend distribution, which is tax-free under the box privilege. The other State recognises the payment as an interest payment which reduces the company’s tax base as a cost. ‘Therefore, the different qualifications of financial instruments may result in an exemption from income while deducting the corresponding expenses. ‘[347]
5.3 Countermeasures against BEPS
5.3.1 National defence mechanisms against BEPS
Since the consultations at OECD level regarding the implementation and implementation of the BEPS program were uncertain and unpredictable for individual states, they first made their own efforts in their national tax laws to address the problem. However, the defence mechanisms of the individual countries diverge considerably in terms of objectives, design and implementation.[348] The Federal Republic of Germany has sufficient instruments both in the individual tax laws and with the foreign tax law as lex specialis to take unilateral action against tax shifting.[350] Above all, elements with an international connection that would entail the (potential) loss or the (potential) restriction of the German tax law, are regulated by special provisions and are referred to as tax easing regulations.[351] As an example, in this context § 4 Abs. 1 sentence 3 EStG, which equates operations which result in a restriction or loss of the German taxation law to a withdrawal for non-business purposes. In practice, this means for the person concerned the discovery of all hidden reserves locked in the economic asset. Similarly to this provision, § 12 KStG is designed as a general de-involvement for corporations, which also provides for the discovery of all hidden reserves in the event of restriction or loss of German tax law. However, § 12 KStG is purely based on operational transactions. All events initiated under company law are subject to the hidden distribution of profits according to § 8 Abs. 3 sentence 2 KStG.[355] The tax easing topic is rounded off in the Foreign Tax Act (AStG), which regulates the exit taxation in § 6 AStG and the additional taxation in § 7 AStG. If a natural person relinquishes his unlimited tax liability in Germany by changing his place of residence and holds shares in a limited company which would fall under § 17 EStG if sold, then the residence task is considered a fictitious sale situation.[356] Similarly, the facts of the additional taxation are regulated. If an unrestricted taxpayer publishes his former domestic activities in his foreign corporation, the income earned there is considered a fictitious distribution of profits to the shareholder.[357] Since the foreign corporation is assessed as an independent tax subject, Germany threatens the loss of taxation rights due to the relocation. Consequently, § 7 AStG violates the otherwise applicable principle of separation in corporations in order to safeguard the right to taxation by means of the principle of transparency.
5.3.2 International action against BEPS
In contrast to many other industrialised and emerging countries, Germany has an “internationally robust tax defense law” (359), so that it was able to contribute its previous experience in the BEPS discussions. The basis for the international consultations was the OECD report "Addressing Base Erosion and Profit Shifting"[360] of February 2013, which for the first time addressed the extent of the international profit shift. As a result, in July of the same year, the G20 members decided to focus more intensively and effectively on the fiscal and economic problem. At the G20 summit in Brisbane in 2014, the BEPS package of measures could already be presented to the assembled heads of state and government, who welcomed and accelerated the efforts. With the publication of the 15-point package of measures on 5 October 2015[361], the almost two-year consultation and consultation phase ended. The OECD had already published 23 draft discussions, held eleven public hearings and prepared more than 12,000 pages of opinions. A working draft of the G20 countries resulted in a list of recommendations for the 62 countries including the numerous supranational organizations such as the EU, ATAF[362], the IMF and the World Bank, as well as for more than 80 other countries[363] The large number of participating emerging and developing countries may seem surprising at first glance, but it should be borne in mind that developing countries are more dependent on corporation tax in percentage terms than industrial nations.[364] This circumstance illustrates the intention of the OECD package of measures to combat not only the symptoms but also the causes of BEPS. The targeted action against BEPS is a common concern of all states that undertake in a coordinated manner to implement the measures and to allow targeted monitoring in terms of transparency.[365] The BMF and the OECD recognise this agreement as a milestone for international tax policy, as binding international tax standards were negotiated and implemented for the first time on this scale. However, BEPS must be regarded as an ongoing project and not a one-off, completed project.
5.3.3. The BEPS catalogue of measures
The BEPS programme contains 15 measures on individual tax avoidance and profit shifting issues, which can be divided into four thematic blocks. The first block is the only one dedicated to the digital economy and its challenges. As a point of discussion, it immediately links to profit shifting and the digital value creation that is closely linked to it. The question of whether the rapidly advancing digitization must also entail an adapted taxation right[367] for predominantly digital companies formed the core of this discourse. However, the idea of a separate taxation practice for digitally active companies was rejected in favour of a continuous adaptation of the current law, which better takes into account the progressive economic conditions. First, the developments in digitalization are to be observed in order to be able to determine the need for action on the basis of these findings.[368]
The second block, covering points two to five, discussed ensuring the international coherence of corporate tax systems. For this purpose, the hybrid effects described above are to be neutralized and effective regulations for additional taxation are to be made. Furthermore, undermining of the tax base caused by interest must be eliminated and harmful tax regimes must be combated. The problem of hybrid designs is solved in practice with the help of a guide[369], which provides for a coordination of the tax treatment of such constructions. The aim is to prevent double taxation and double non-taxation while ensuring one-off taxation. The field of additional taxation mainly concerns states that do not yet have such a legal standard and are now to enshrine it in law in order to counter the shift in profits. Similarly, there is the problem of tax reduction by deduction of interest, in which companies are encouraged by deductible interest on debt to borrow massively. The result of the consultations was an agreement on regulations that correspond to the principle of the German interest rate barrier[370]. As regards harmful tax competition, the substance requirement for granting tax patent boxes was agreed. This means that the use of tax-deferred patent boxes is only possible for patents whose research and development work was also carried out in the state of the patent box. Tax rulings[371] still require the prior request of other affected states.
Points six to ten relate to compliance with international tax standards. While paragraphs six and seven regulate the mandatory inclusion of passages on the abuse of agreements and on the clear definition of premises in the OECD model agreements, measures eight to ten deal with transfer pricing[372]. In order to limit the profit-shifting use of transfer pricing, a transfer pricing guideline[373] was devised, addressing in particular the problem of setting arm's length transfer prices for intangible assets. ‘Only an appropriate profit accrual based on uniform international standards ensures international competitive neutrality and uniformity of taxation. “[374]”
The fourth block comprises the last five measures of the BEPS project and deals with ensuring transparency in different areas. This includes the calculation of the economic damage caused by profit shifting and tax optimisation, the disclosure of aggressive tax planning to the competent tax authorities, transfer pricing documentation and auditing at an international and local level as well as in the form of the Country-by-Country Report (CbCR)[375] as well as improved administrative cooperation in understanding and arbitration procedures.
Legally of great interest is the latter point, which provides for the creation of a so-called Multilateral Instrument[376]. This legal methodology is not intended as an interpretative aid for the interpretation of the BEPS decisions, but rather replaces “substantial law insofar as a concrete existing DTA between two member states is immediately changed”.[377] Thus, it expresses the fear of the participating nations of a lengthy and exhaustive transposition of the BEPS measures into national law or as a standard in their existing double taxation agreements. The Multilateral Instrument is intended to replace lengthy separate renegotiations of the approximately 2,000 DBAs existing worldwide by implementing and implementing the BEPS measures “certainly uno actu”[379] in existing contracts. Although the OECD itself still sees a need for clarification regarding the legal design of the Multilateral Instrument and admits almost ninety pages of commentary to the explanatory notes, the key points are determined. In contrast to the modular structure of this instrument initially envisaged, in which the contracting states could have individually selected the articles relevant for the adaptation of the DTA, the OECD has now opted for an opt-out model for practical reasons[381]. Accordingly, the Multilateral Instrument applies without reservation, unless the States exclude individual articles or paragraphs in the text of the Treaty. However, a concrete change in the DTA presupposes a consensual choice of both states regarding the points not included in the agreement. Nevertheless, the Multilateral Instrument clearly stipulates that there will be a legal coexistence between the concluded DTA and the Multilateral Instrument. ‘[382] However, the handling of this dualism is not the only open question regarding the implementation of this instrument.[383] Although everyone involved is aware that the Multilateral Instrument needs an implementing law in order to transform it from the level of international law into national law, both the Federal Ministry of Finance and the Federal Ministry of Justice doubt the constitutional possibilities with regard to the principle of certainty. Therefore, the Multilateral Instrument would first have to be declared binding by agreement between the parties before it could have legal effect. However, this problem contradicts the entire intention of the instrument.
In the wake of the euphoria and scientific discussion surrounding the BEPS measures, the EU made another attempt to harmonise the corporate tax law of the European Union member states. Because the “royal way” and ultimately the only fully effective solution for the prevention of “hybrid mismatches” would be the harmonization of tax systems. “[384]”
6th EU project in the area of corporate tax
6.1 Common Consolidated Corporate Tax Base (CCCTB)
The OECD-responsible and coordinated BEPS Action Programme prompted the EU to resume its own, but longer dormant, efforts to implement harmonisation in the area of European corporate tax. Although the beginnings of this project date back to 1975, this plan has not yet been realized. While the individual member states were reluctant to cede far-reaching sovereign rights, such as taxation, to the EU, the European community of states simply lacked the legal power to implement them in the area of direct taxes. Rather, the guiding principle of tax competition enshrined in the TFEU[386] was increasingly in the foreground. Indeed, unlike VAT, which is very important as an end-user tax for the national tax revenue but must be regarded as a consecutive item at company level[387], a change in corporation tax acts directly as a competitive economic policy factor for companies and states at the same time. The respective nation states make use of their freedom to shape corporate tax within the framework of their national economic policy. For companies, corporate tax represents a profit-reducing cost factor, which must be reduced if necessary by means of tax planning or business relocation. As a result, consensus has not yet been reached on the harmonisation of direct taxes, although the EU is keen to keep this issue on the political agenda.
6.2. Harmonisation efforts 2011
The most recent move towards corporate tax harmonisation was also made in 2011 by the EU, which submitted its drafts[388] to the member states in a directive. The aim of the harmonisation effort was to promote economic growth and the EU internal market.[389] In doing so, the EU responded, on the one hand, to the consequences of the European economic crisis and, on the other hand, to the successful implementation of the 2006 VAT Directive[390], which largely unified the area of VAT. The harmonisation of corporate tax law was a logical second step for the EU to create a more uniform European internal market for tax purposes and thus jointly reduce debt and debt taxation. Better cope with the financial crisis.[391] The harmonisation efforts included two projects: the creation of a harmonised corporate tax base and a consolidated common corporate tax base. Since the creation of a consolidated tax base was based both on the content and thematically on the harmonised CST tax base, the EU combined both objectives into one major project in the directive. The system was aimed at all companies based in an EU country, regardless of their size, as well as at the European branches of companies from abroad. The assessment process initially provided for the recording of tax results for each company separately. If other companies belonging to the same group were also active in the EU, all results should be combined into a consolidated profit (consolidated corporate tax base). This European[392] Consolidated results should then in turn be broken down by the breakdown factors labour, assets and turnover in such a way that each member country with a permanent establishment of the group can be informed of an individual basis for assessment. The labour factor is composed of the two equal parts payroll and number of employees; assets include only material assets that are immobile. However, the main points of that directive concerned the tax rate, which differed per Member State[393], and the optional nature of the system[394]. This means that companies were free to choose whether they wanted to be assessed under the new EU system or under old national law. On the part of the financial administration, it must therefore be ensured that both options for selection for investment were possible and feasible.[395]
7th EU Directives
7.1. draft 2011
The Federal Government accepted in the course of a small request[396] of the Alliance 90/ The Greens[397] Position on the EU Directive. In it, the then Federal Government stressed that it supported the removal of tax obstacles in the EU and therefore had accompanied the project, which resulted in the EU Directive, in advance in project groups. It sees advantages in particular in the area of a common tax base, which could “enhance greater coherence of national tax laws in the area of corporate taxation in the Community and reduce bureaucratic burdens”[398]. As a result of these efforts, the restriction of the special arrangements granted by the states can be seen, which in turn reduces the tax distortions of competition between the EU states. The German Government takes a critical view of the plans described in the Directive with regard to consolidation and the associated administrative tasks, since this regulation poses a risk of loss of revenue for Germany. These are a consequence of the planned cross-border loss offsetting and the valuation of intangible assets in the distribution mechanism. ‘In addition, the allocation mechanism offers significant opportunities for profit and loss shifts’[399], which is mainly favoured by the different corporate tax rates. The German government is therefore particularly critical of the optional application of this system, since “two very different and very complex systems would exist side by side, which would result in significantly increasing bureaucratic burdens for companies and financial authorities, especially because it could be switched between both systems”. “[400]” Due to pending analyses of the tax implications of the project, the government does not want to provide more detailed information on individual points at this time, but will only advocate the introduction of a common tax base at EU working group level, but not for the projects going beyond it.[401] Since other governments, including those of the Netherlands, are also sceptical about the project, the timetable set by the EU is very ambitious and the political implementation is uncertain.[402] From the author’s point of view, the Federal Government of the time was right in its latest assessment, because the EU’s efforts to achieve harmonisation could not be achieved politically in 2011.
7.2 Draft 2016
A new opportunity to realise the harmonisation efforts in the area of corporate taxation was seen by the EU as a given in the context of the BEPS project activities, in which it had participated as a player. On 17 June 2015, the EU published an action plan aimed at more efficient corporate taxation in the EU. The Common Consolidated Corporate Tax Base (CCCTB) initiative[403] again includes a Common Corporate Tax Base (CCCTB) as a basic element and was presented by the EU on 25 October 2016 as a draft directive[404]. In terms of content, the Commission proposal was strongly based on the 2011 Directive, but in response to the 2011 Directive, “a very ambitious project”[405], the EU has now taken a step-by-step approach. The 2011 directive ultimately failed because controversies about individual points slowed down the overall process. ‘In an effort to make progress without further such delays’[406], the Commission divided the proposal into many separate sub-items, focusing on a common corporate tax base. One lesson from the experience of 2011 was to suspend the discourse on consolidation initially and until agreement was reached on the common tax base. In the following sentence, while the Commission is quick to emphasise that both projects should be implemented in a single initiative, this statement does not appear convincing within the overall presentation. In the opinion of the author, the division of the directive into individual sections under discussion shows little courage and determination on the part of the Commission as to the feasibility of the project. The timetable set by the Commission foresees that, as a first step, the BEPS Action Plan will first be applied within the EU, which will be adopted on 28 May. In January 2016, agreement was reached among the member states.[407] Step two then includes the implementation of the proposal for a directive of 25 October 2016. The concretization and harmonization of material profit determination facts should be realized in 2017, before then in the fourth step a discourse on the details of the consolidation should end the project.[408]
“The newly launched CCCTB project would not only help combat tax avoidance, but would continue to act as a system of corporate taxation that facilitates cross-border trade and investment in the internal market.” “[409]” These clarifications on the objective of the CCCTB illustrate that the original objective of the 2011 Directive, namely to promote economic growth and the internal market, has been neglected.[410] However, the Commission is pursuing the objectives set in 2011 in an indirect manner, since harmonising the corporate tax base would make tax competition within the EU fairer and more efficient. This strengthens the internal market, creates growth and curbs profit shifting.[411] The designation of these indirect objectives is legally relevant as they are in line with Article 115 TFEU, which empowers the EU to adopt and implement measures for the establishment and functioning of the internal market. Accordingly, the explanatory memorandum[412] for the Directive is formulated, which emphasises the facilitation of the taxable person by the unification of tax law in everyday transactions. In addition, the measures specified in the Directive are likely to make the internal market more robust and stronger than aggressive tax planning.[413] The legality of the project with regard to the principle of subsidiarity is respected as ‘these objectives are not feasible through uncoordinated individual measures by the Member States’ and therefore ‘need to act at Union level’. If the individual member states were to act instead of the EU through national laws, this would mean a consolidation and an aggravation of the current state.[415] The measures can only really work if they are applied uniformly throughout the internal market. After all, it is precisely the uncoordinated national tax systems that are the cause of tax planning and profit shifting in the EU area. The harmonisation of the corporate tax base eliminates tax-damaging abuse without restricting the right of Member States to fiscal sovereignty.[417] The proportionality principle of the measure is also respected because the EU implements a holistic solution to the problem. Individual attempts at coordination have proven to be a lengthy and so far not effective process, so that the EU was forced to act legally.[418] A restriction to non-binding law[419] entails the risk that member states could decide against the transposition or for only a partial transposition of the directive. Both options would create legal uncertainty for the taxpayer and could jeopardize the overall project. As a result of the abovementioned reasons and as a direct consequence of Article 115 TFEU, which provides that ‘direct taxation legislation may be adopted exclusively in the form of directives’[420], the Commission has decided to submit this Directive.[421] In accordance with Article 288 TFEU, this is binding on all Member States with regard to the achievement of targets.[422]
7.3. The 2016 draft directive
The 2016 CCCTB Directive proposal is structured into 72 articles in 12 chapters. As a result of aggressive tax planning and the consequent disruption of a well-functioning internal market, the EU is forced to reduce existing inconsistencies in corporate tax systems in order to reduce discrimination and promote growth and investment. In order to achieve this objective, the proposal for a directive of 2011, which provided for the harmonisation of corporate tax systems in order to promote the economy and the internal market, is to be taken up again. Due to the time constraints and the ambition in the implementation of this draft project, the EU considers in point four[423] the division of the initiative into two sections: first, a harmonised corporate tax base should be created before the details of the consolidation are discussed and implemented.[424]
The objective of Directive 2016 is justified in Article 1(1): ‘This Directive establishes a system of a common assessment base for the taxation of certain undertakings and regulates the calculation of that base’. “[425]” Compared to Directive 2011, the EU broadens the scope of the current Directive by subjecting companies subject to corporate tax in addition to corporations, which are subject to corporate tax in at least one EU Member State[426] or have a permanent establishment[427], to the new rules.[428] Another important difference is the abandonment of the optional system of the previous entrepreneurial choice towards a mandatory system[429] for companies that meet certain conditions. Under European law, companies[430] are affected by the new regulations if, in addition to the criteria already mentioned[431], they achieve a consolidated total turnover of more than 750 million euros[432]. The same criteria apply in principle to companies from third countries, only the feature of a legal form established under the law of the Member States is omitted.[433] In addition, companies that meet the formal requirements but not the sales-related thresholds have the possibility of a voluntary optimization, which applies for five years.[434] The EU sees the mandatory regulations as well as the aforementioned size-dependent threshold value in the structures of aggressive tax planning, since only companies that have "a minimum of resources"[435] are capable of tax design models to this extent.[436]
In line with the BEPS project as well as current tax design practice, Article contains four definitions to eliminate the resulting legal uncertainties. However, the EU-inspired definition of the concept of permanent establishment[437] is limited only to permanent establishments located in the EU.[438] Neither rules on premises in third countries nor on artificial avoidance[439] of establishing a premises have found their way into the Directive. According to the Directive, both aspects are to be regulated by bilateral agreements or by national law of the member states due to the “complicated interactions”[440].
The second chapter of the Directive mainly defines terms such as tax-free expenses[441], deductible expenses[442] and general principles[443] for calculating the tax base, but it also regulates provisions on growth and investment allowances (FWI)[444] and interest rate barriers[445].
In order to neutralise the existing mismatching[446] between the deductibility of interest expenses and debt as operating expenses and the non-deductibility of profit distributions, the Directive introduces the granting of an FWI. Such an allowance should result from the balance of equity at the beginning and end of a marketing year multiplied by the ECB’s benchmark yield on ten-year government bonds[447], which is then deducted from the assessment base.[448] The EU hopes that such an exemption will provide incentives for capital formation and, as a result, financially “robust”[449] companies.
Closely linked to this line of thought is the EU's plan for an increased deduction of research and development costs. With the exception of immovable assets, research and development costs should be fully deductible through increased deductions in the year of their creation. Companies whose research and development costs do not exceed the amount of twenty million euros will be granted an additional deduction amount of 50% of the additional expenses. For companies that exceed the twenty million euros mark, a half deduction amount is provided.[450]
In the area of excessive interest payments between parts of the company or between parent and subsidiary companies, the EU Directive requires the restriction of interest expenses that exceed the income generated by a company from interest income. The regulations described in the directive are comparable to the German interest rate barrier according to § 4h EStG, but the EU regulation provides for an exemption of one million euros instead of the German exemption limit of three million euros.[452] Subsequent Articles fifteen to twenty-eight and thirty to forty of the directive contain provisions on technical provisions which are not to be discussed further in this work. Only Article twenty-nine describes the area of exit taxation, but this is approximately congruent with the German regulations[453] on this topic.[454]
Much more interesting is chapter V with explanations about losses and loss offsets. While Article forty-one deals with losses in general and their deductibility, the following article deals with loss offsets between the parent company and immediate subsidiaries or between establishments in different EU countries. A set-off of losses between the mentioned parts of the company should be allowed in proportion to the shareholding, provided that subsequent profits of the subsidiary are also included in the assessment of the parent company and increase it.[455] This passage is intended to safeguard the national tax revenue of the individual states when applying this scheme.
Next[456], Chapter IX is devoted to the misuse rules and the tax design tool of hybrid mismatches. The general provisions on abuse referred to in article fifty-eight are similar to the German regulations in § 42 AO and should not be further detailed here. Article sixty-one stipulates that in cases of hybrid companies and hybrid financing instruments, the source state shall take over the tax valuation of the residency state in order to neutralize such forms of tax arrangements.[457] The transition from the exemption method to the accounting method for dividends and profits from the sale of shares of subsidiaries and profits from permanent establishments located in third countries should also be regarded as a tightening up of taxation practices.
For the implementation of the second phase of the EU draft directive, no regulations have been made within the actual directive. Only the previously presented calculation formula from 2011 is listed again in the foreword. It can therefore be assumed that the 2011 calculation formula will serve as a basis for the later discussions.
7.4. A critical appraisal of EU plans
After the publication of the BEPS Action Plan as well as the draft EU directives, the opinions of experts on the evaluation of the adopted measures differed enormously. “The BEPS package of measures represents the first substantial – and overdue – revision of international tax standards in nearly a century”[458], the OECD sums up in its explanations of this project. The Action Plan makes a significant contribution to combating profit cuts and profit shifts, as well as to the sustainable taxation of cross-border activities and the avoidance of double taxation, which is a result of the coordinated action of the G20 and OECD as well as many nation states. “The fact that so many countries have participated in the work ... is in itself a clear success of the project”[459], explains the OECD. In addition to the agreement of numerous comprehensive packages of measures, in particular the determination of minimum standards by the participating nations is a success of this project, as the “non-action” of some states would have caused negative spillovers... “[460]” To conclude its conclusion, the OECD points to the creation of the multilateral instrument, which speeds up the implementation of the agreement and at the same time spares the renegotiation of DTAs.[461]
The Federal Government’s conclusion on BEPS is similarly positive. The Federal Ministry of Finance describes the agreement as a “milestone for international tax policy”. “[462]” In terms of content, the BMF acknowledges the merits of the project, whose recommendations for action can reduce numerous BEPS problems in the form of the action plan.[463] Nevertheless, the Ministry stresses that the EU has a coordinating role to play in the consistent and consistent implementation of the Action Plan, as the measures to be taken must be discussed in the European fora. At the same time, the BMF emphasises that Germany has already transposed the BEPS recommendations into national law. Incidentally, Germany already has a robust tax defense right by international standards. “[464]”
The above-mentioned coordinating role of the EU in the implementation of the BEPS recommendations and the accompanying assessment of the CCCTB Directive are, however, only partially approved by the ministry: The Federal Government and the majority of the member states have welcomed the new version of the CCCTB project from 2011 in principle, especially with regard to the pragmatic two-stage approach. “[465]” The emphasis on the two-step approach makes the cautious, benevolent approval of the first half sentence sound like diplomatically packaged criticism in the author’s opinion. Despite the change of government[466], the political outlook on harmonization seems to have hardly changed. While the German government welcomes the BEPS recommendations, it remains very critical of a common consolidated corporate tax base.
Although the political project of the BEPS project is described in the literature as a "historic international tax project"[467] and is recognized, the experts criticize both the usefulness of the project and its technical implementation. Florian Haase harshly criticizes the BEPS project, whose usefulness he strongly doubts: Valid empirical/quantitative studies on profit shifts were hardly available and the fact that the problems (i.e. the causes of BEPS) are to be sought to a large extent in the tax policy and tax legislation of the states themselves is now futile to emphasize. “[468]” In addition, Germany had made itself the pioneer of the BEPS movement because it had confused cause and correlation in the field. The causes of the German problems[469] are a consequence of the consistent and systematic tax policy of the other states, not that of the tax structure. Schnorberger complains that as a result of his study, more and more companies would have to tax their profits both at home and abroad. This opinion is supported by the investigations of both Hörster and Jehl-Magnus, who have both analysed the Anti-BEPS Implementation Act[471] and its effects. Both criticize that the law was “burdened” with numerous other regulations during the parliamentary procedure[472] and that the original goal is hardly recognizable. The result is a complex legal system with aggravating changes for the taxpayer.[473] As a result, the EU’s remaining efforts at harmonisation in the area of consolidation are dwindling its chances of realisation, as the EU itself appreciates. Although some States that would benefit from the CCCTB initiative expressed interest, the implementation of the project requires unanimity in accordance with 115 TFEU.
8th conclusion
The feasibility of a harmonised, EU-wide corporate tax adjustment has shown how profound and multifaceted this issue is. The harmonisation of the corporate tax base planned and advocated by the EU has the legal drawback that the EU lacks the contractual and thus legal basis to ensure legal harmonisation independently in the field of direct taxes. Article 115 TFEU requires them to empower the Member States to intervene in this area. The second critical factor must be the overall tax system of each EU Member State. As the present work exemplifies the history of German corporate tax, a national individual tax is always embedded in an overall tax system and is subject to tax law interaction with other taxes. The interaction between income tax and corporate income tax in Germany was not smooth, as the almost permanent problem of double taxation for shareholders has shown. The result of this tax problem was a relief system between income tax and corporate tax, which was intended to reduce the double burden on the taxpayer. However, these relief or compensation systems between the two types of tax are different nationally. While some states practice the classic corporate tax system without an accounting system, other states exempt profits subject to corporate tax in income tax. Most EU countries use a partial accounting system, but the details vary again. The choice of the corporate tax system has a direct impact on the corporate tax rate, but this is not meaningful in isolation, as the international comparison of corporate taxation has shown. One result of this historical development is the national corporate tax systems of the Member States and the tax gaps resulting from the incongruity of the systems with respect to each other. Since coordination between two states has not yet taken place and each state has used its own assessment criteria to assess a situation, tax arrangements have arisen. The globalised world economy and the digitalisation of industry have enabled companies to separate the place of taxation from the place of value creation. This resulted in aggressive tax planning and entrepreneurial profit shifting, the extent to which states adopted the BEPS recommendations. In this context, the EU draft directive on a common consolidated corporate tax base must also be seen. In addition to the implementation of the BEPS measures, taking particular account of the realities of the internal market, this Directive also aimed at the EU-wide corporate tax adjustment, but pending its implementation.
While the transposition of the first stage of the EU Directive into national law is in the offing, i.e. In the field of EU-wide consolidation, an equally rapid approach must be called into question. The main problem at this stage seems to be the moderate will of the member states to implement the project effectively. However, since the EU is dependent on the (unanimous) cooperation of the Member States in this area, it lacks the legal means to accelerate the project. At the national level, the assessment or interest in this topic is differentiated, as not all states would benefit to the same extent from a consolidated corporate tax base. The loss of tax revenues and the associated shift of national sovereignty rights are naturally difficult for individual states, as both historical consideration and the history of the EU have shown. In times of political renationalisation in some individual states, such a project is very difficult to implement politically. In addition to the fiscal reasons, the static interpretation of the formula of the tax base is also a criticism of many member states. They fear a shift from labour-intensive value creation processes to low-wage or low-tax countries and the associated loss of jobs. The final criticism, which should not be underestimated, is the extent of such harmonisation in the overall tax system. As explained, the compensation, i.e. the relief of shareholders in the area of double burden by way of national tax legislation. National corporate tax accounting schemes include mechanisms to reduce the double burden on shareholders, either at the level of corporate tax or at the level of shareholder income tax. With the EU-wide harmonisation of the (consolidated) corporate tax base, this process would become partly obsolete, since standardisation at corporate tax level would not take into account the different national compensation mechanisms at income tax level. The same applies to the area of local authority taxes and charges, which are also specific to each Member State. Harmonisation of corporate tax systems without a simultaneous reform of the interacting national income taxes leads to permanent distortions of competition and undesirable double burdens. Consequently, in a second step, consideration should also be given to harmonisation in the field of income tax and to harmonisation of the accounting procedure between income tax and corporate tax in the Member States. However, such a far-reaching step is currently inconceivable in view of the current political controversies over the design of the CCCTB. Perhaps the EU's strategic consideration of tackling the project in stages was a politically wise move.
This article does not replace tax or legal advice in an individual case. Facts, current law, jurisdiction, documentation and implementation remain decisive.