Complicated tax system – and now it’s getting more complex – economy

There is a package of measures against unwanted tax evasion and there is now also an international alliance for new global tax allocation rules and a global minimum tax. The impressive result: a consensus on a new international tax regime. A step that can be seen as a big step in the right direction – in the fight for taxation at the place of value creation, against tax evasion and for uniform tax rules at international level. Unfortunately, the global advance poses a major problem.

Because if you want to adopt uniform regulations at the international level, you have to agree on a lot of things, for example on a definition of profits and sales. This is not easy, because the new tax code must take into account the different tax realities in different countries. In addition, benchmarks and tax thresholds that define who and who is affected by the new rules should keep pace with new developments, for example in business models. They will therefore have to be regularly renegotiated in the future.

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Caren Sureth-Sloane is Professor of Corporate Taxation at the University of Paderborn and spokesperson for the DFG Collaborative Research Center “Accounting for Transparency”.

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The result: compromises and vagueness again and again. The result: complex tax regulations and framework conditions. Even with the best of intentions, it is not easy to follow these complex regulations and meet tax obligations. It also increases uncertainty about the tax burdens businesses will face in the future. It’s bad for investing.

Developments in recent years clearly show that the tax system is already seen as increasingly complex. This is confirmed by the “Global MNC Tax Complexity Survey”, in which tax experts are interviewed every two years. The latest assessments show that in 58 out of 110 countries, the general tax complexity of multinational companies has increased. Although tax security and simplification have long been a priority for states, increasing tax complexity in many countries, including Germany, has been a trend that has continued for several years.

The survey clearly identifies the most complex area of ​​tax regulation in the world: tax transfer pricing. Multinational companies need it to pay for goods and services between group subsidiaries. If, for example, the marketing department of country A develops an advertising campaign for the product produced and sold in country B, then the group company of A invoices the subsidiary of B for the internal advertising campaign. These transfer prices largely determine the distribution of a group’s tax benefits among countries.

The inherent complexity of transfer pricing is the result of many things. Gaps in the development of new regulations that lead to ambiguity, inconsistent application of rules and therefore inconsistent action by participating States. In addition, there are increasingly comprehensive documentation requirements and a lack of clarity as to how this aggregate information affects the assessment of tax matters. This means that disputes between companies and tax authorities are on the rise. Disputes are problematic, in particular because the time required to settle them is considered to be one of the main factors of complexity. If a dispute cannot be settled or if it takes a very long time to settle, there will be double taxation and therefore additional costs for the companies concerned.

Tax risks can help determine a country’s attractiveness as a location

Although tax security and avoidance of double taxation are particularly important goals for the designers of the new tax code, it is not clear how these goals can ultimately be reliably achieved. Fiscal transfer pricing will also be required in the future. It is not clear what the new rules will look like in practice. For example, what detailed rules will be agreed to determine the tax share of a country in which the basic marketing and sales activities take place, but in which, according to traditional calculations, little profit is made. This carries huge risks, especially for digital business models. It is also unclear how countries that have not previously participated in tax audits due to a lack of tax ties will change audit processes and therefore corporate tax burdens.

How companies perceive tax complexity and tax risks in certain countries can ultimately determine a country’s attractiveness as a business location. International studies show that complex tax reporting processes and tax audits in particular are associated with an unfavorable assessment of the location of the investment.

Complex tax rules have consequences not only for large multinational companies, but also generally, for example for small and medium-sized enterprises. A German-wide study shows how small and medium-sized businesses in Germany in particular think about tax complexity: around 90% of respondents consider the German tax system to be too complex. The study also suggests that this assessment may have a direct impact on entrepreneurial activity. Many of those interviewed said their investing activity is hampered by the administrative burden and complexity of the tax system.

In order to create a good environment for business, especially in the current sometimes tense situation, and to ensure that tax support and stimulus measures also have an effect, reliable framework conditions, dispute settlement mechanisms and trust in the state are essential. Tax security must therefore be a central element of reforms. The upcoming changes in international taxation and their domestic implementation will, at least in the short term, bring new uncertainties and bureaucratic costs. On the way to and as the core of a better tax system, a uniform implementation of the new rules as well as efficient and simple means of prior clarification and dispute settlement are indispensable – at the level of individual states and supranational.

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