The aim is to publish a coordinated set of rules, still in 2020, that could then provide a basis for the German legislative process and for the renegotiation of DTAs in order to avoid double taxation.
The OECD’s coordinated set of rules
The four components described below make up the OECD’s proposed set of rules.
Income inclusion rule – access to taxation rights
In this way, it will be possible to impose additional tax on the income of a foreign subsidiary whose income was taxed at a rate that was too low, in the state where the head office of its parent company is located. In doing so, the tax rate that was too low, which had been used for the subsidiary, would be hiked up to at least the applicable worldwide standard minimum rate. Furthermore, hiking up the tax rate to match the higher level of that of the parent company is under discussion as an alternative. At present, there is a preference for a standard minimum tax rate, as this would be simpler to manage. This rate could be in a range between 5% and 15%.
Please note: Ultimately, this provision constitutes CFC tax rules that are not based on activity and substance.
Switch-over rule – changeover to German taxation
Under a DTA, in the case of an exemption for the income of a permanent establishment in a low tax country, it would be possible to switch to a credit method for the purpose of hiking up the taxation of the profits of the permanent establishment. Here you could expect the tax rate of the German head office to be applied to the income of the foreign permanent establishment.
Undertaxed payments rule – restriction with respect to the deduction of expenses
In order to compensate for a foreign parent company that had paid “too little” tax the payments of the German subsidiary to the parent company would have tax imposed on them. Besides restricting the amount of operating expenses that a subsidiary company would be able to deduct, it would also be possible to set up withholding tax on the payment to the parent company. In any case, the relevant minimum tax rate of the parent company would have to be provisionally (prior to the completion of the respective assessment procedure) calculated as under section 1.
A particular scope of application for the undertaxed payments rule would be cross-border royalty payments. However, the aim is also to include interest payments or service charges.
Please note: Consideration is even being given to including payments to third parties when auditing the taxation of the recipient of a payment.
Subject to tax rule – no DTA benefits
Benefits arising from agreements should be linked to additional conditions. Certain DTAs would have to be supplemented to the effect that, for example, reduced withholding tax on royalty and interest payments would depend on adequate taxation of the income in the state where the head office of the recipient of a payment was located. A consequence in Germany could be a return to the withholding tax of 15.825% on payments to foreign companies, as set out in the Income Tax Act (Einkommenssteuergesetz, EStG) (national deduction of tax at source under Section 50a (1) no. 3 and (2) EStG plus the solidarity surcharge).
Federal Ministry of Finance – Breakthrough on minimum tax
International gaps in taxation were recognised as being a key problem and should be closed for all cross-border company relationships. In the opinion of the Federal Ministry of Finance (Bundesministerium der Finanzen, BMF) (cf. the opinion statement from 13.6.2019 that followed the G20 Summit on 8/9.6.2019), taxing income at a rate below a minimum rate constitutes a harmful shifting of profits. The decision on what the standard minimum rate of tax should be is still outstanding. The authority to levy taxes will remain with the individual countries. Comprehensive minimum taxation could make unilateral actions, such as the German royalty barrier (Section 4j EStG), superfluous.