Giant companies are doing what small companies can’t do – fleeing to so-called “Tax havens”. For these reasons, US Treasury Secretary Ms. Janet Yellen proposed a global minimum tax rate in April this year. Although this type of reform was immediately met with resistance, an agreement will most likely be reached.
Compiling tax reports gives multinational companies a lot of work and problems. Unlike individuals, giant companies are often active in a wider area, so they can transfer money and profits where it suits them. Most often they choose the so-called “Tax havens” in which they do not pay a fees. The result is a drop in tax rates for large companies around the world.
The discovery that large concerns, such as Google or Apple, thus avoided paying taxes resonated negatively with the public. Although they emphasize that they adhere to all “national and international rules” such as tax breaks that are completely legal in a country, it does not mean that such a way of doing business is correct and legitimate.
THE REALITY IN TAX PAYMENT
The European Commission asked Amazon for a tax surcharge in front of a court in Luxembourg in May 2021., but the EC court ruled in favor of Amazon. The lawsuit against Apple for non-payment of taxes in Ireland was similar – and there the EU was left with empty pockets.
The reality of paying taxes is even more bizarre, so Luxembourg’s taxpayers approved a 56 million euro tax refund to Amazon, which has its headquarters for Europe there, even though Amazon increased its turnover by a third.
“AGREEMENT OF THE CENTURY” ACHIEVED
The finance ministers of a group of G7 member states claim to have reached an “agreement of the century” – an agreement on a global and minimum tax rate of 15%. A similar agreement was reached after the First World War in the League of Nations when it was determined how companies would pay taxes where their physical headquarters are. The agreement has been accepted by almost all countries and is a prerequisite for all agreements on international trade – until today.
The finance ministers of the G7 member states agreed on one thing: the principle of “headquarters” should be replaced by the principle of “traffic“. The very essence of the agreement lies in simplicity and fairness: companies will pay taxes where they generate turnover, regardless of its form. This means that, for example, Google or Facebook will pay profit tax to Germany because in that country they collect data and generate income from the sale of advertisements.
The initiative for the agreement was first expressed by the new US Minister of Finance Ms. Janet Yellen. Although Ms. Yellen and the new US President Mr. Joseph Biden demanded a tax rate of 21%, for many it was too high. The British Minister of Finance, Mr. Rishi Sunak was hesitant at first, but he was helped by the calculation of the University of Oxford, according to which half of the international companies based in Great Britain do not pay a penny in taxes.
THE TAX REVOLUTION
German Finance Minister Mr. Olaf Scholz is delighted with the new “tax revolution”, as he called it, although German carmakers will pay taxes to China – because it is their biggest market. According to the minister’s estimate, about 50 billion dollars a year will arrive in the treasury of Berlin as a result of the new tax reform.
Changing the very principle of paying taxes, in any case, requires an international agreement. The G7 member states leave room for agreement on the details, and a big step will be taken if the agreement is adopted by the USA, Germany, France, Great Britain, Japan, Italy, and Canada.
China also predicts a positive outcome of the agreement. China is a large exporter but can count on turnover revenues in its large market.
The agreement will not go smoothly, so there are opponents of the principle among the members of the European Union. Ireland is the loudest in that, and the Netherlands and Luxembourg, members of “friendly” tax rates, are not far behind.
The competition of countries around the world in lower and lower taxes does not lead to good. In the 1980s, Germany taxed companies at a rate of 60%, today it is around 30%, while in the past few decades in the United States the tax rate has dropped from 50% to 25%.
The states should strive for a mutual agreement because competition in the lowest possible tax does not benefit any of the states in the long run.
Although leaders are aware that some countries around the world will never agree to such a principle, reform and reaching an agreement are necessary.
SERBIA AT THE BOTTOM OF THE TABLE
According to its profit tax rates, Serbia is at the bottom of the table. Comparing the corporate income tax rate in Serbia with taxes in European Union countries, Ireland (12.5%) Bulgaria (10%), Croatia (10%) Hungary (9%) have a lower rate, while in the European Union France and Germany lead with corporate income tax rates of 30%.
The corporate income tax rate in Serbia is 15%.
The withholding tax rate in Serbia is, however, slightly different, and is defined in Article 40 of the Law on Corporate Income Tax. It is paid on interest, dividends, profit shares, royalties, and fees for other intellectual property rights, for market research services, tax and business consulting, and fees from the lease and sublease of real estate and movables in the territory of the Republic of Serbia.
The withholding tax is paid at the rate of 20% on all income that non-resident persons earn from resident legal entities unless Serbia has not signed a Double Taxation Agreement with the non-resident state that generates income.
WHAT DOES THE NEW AGREEMENT MEAN FOR SERBIA?
According to the agreement of the G7 members, after paying a profit tax on a part of the profit in the countries where the profit was made, the difference of up to a minimum of 15% will be paid by the multinational company in the country of establishment.
Given that Serbia is a significant importer, taxation by place of profit could have positive tax effects on the state budget. In contrast, Serbian IT companies, which generate most of their revenues in foreign markets, are unlikely to fill the state coffers at all based on profit taxes.
The positive and negative effects of this agreement have not yet been sufficiently explored, however, as in the rest of the world, it will bring with it thinking about the necessary changes.