Today, the governments of all countries are facing a loss of revenue caused by the transfer of investments to countries with a lower tax burden – in the so-called tax havens. For the same reasons, US Treasury Secretary Janet Yellen proposed a global minimum tax rate back in April. Although this type of reform immediately met with resistance, an agreement will most likely be reached.
Efforts to reduce or avoid taxes as much as possible exist in most taxpayers and have always been a topic of discussion. At the international level, taxpayers have the opportunity to avoid paying taxes by taking advantage of the diversity of tax systems of other countries. Therefore, many countries apply different tax mechanisms to gain a competitive advantage and attract businesses. Giant multinational corporations are often active in the wider area, so they can transfer money and profits where it suits them. They usually choose “tax havens” where very little or no tax is paid. 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 have granted a staggering $ 56 million in tax refunds to Amazon, which has its European headquarters there. It should be noted that Amazon has increased its turnover by a third, bringing us to total revenue of € 42 billion.
“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.
U.S. Treasury Secretary Janet Yellen was the first to express the initiative for the deal. US President Biden and Minister Yellen demanded a rate of 21%, but such a high percentage was not accepted. A study by the University of Oxford indicates that half of the international companies based in the UK do not pay a penny in taxes, so the British Minister of Finance Rishi Sunak supported the proposal.
TAX REVOLUTION
German Finance Minister Olaf Scholz backed the proposal, although German carmakers will pay taxes to China – because it is their largest market. According to the minister’s estimate, about $ 50 billion a year will arrive in Berlin’s coffers due to 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.
CROATIA AT THE BOTTOM OF THE LIST
Croatia is at the bottom in terms of corporate income tax rates, although we all see it as a country of high taxes. Comparing Croatia with other European Union countries, only Bulgaria has a lower rate with 10% and Hungary with 9%, while in the European Union, France and Germany are in the lead with profit tax rates of 30%.
Income tax in Croatia thus amounts to 10% of revenues in the tax period amounted to HRK 7,500,000.00, or 18% of revenues in the tax period were equal to or greater than HRK 7,500,000.01.
The withholding tax rate in Croatia is slightly different, however, and is defined in Article 31 of the Income Tax Act. It is paid on interest, dividends, profit shares, royalties, and fees for other intellectual property rights, for market research services, tax and business consulting, auditing services, and for performances by foreign contractors.
Withholding tax is paid at the rate of 10% on dividends, profit shares, and performances of foreign performers, and 15% on all other listed fees. It should be noted that the withholding tax is paid at the rate of 20% on all the above fees if the recipient of the fee is based in one of the countries on the EU list of non-cooperative jurisdictions for tax purposes, with which the Republic of Croatia does not apply the Double Taxation Treaty.
WHAT DOES THE NEW AGREEMENT MEAN FOR CROATIA?
After paying profit tax on part of the profits 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 Croatia is a significant importer, taxation by place of profit could have positive tax effects on the state treasury. Despite that, Croatian high-tech companies, ie the IT sector, which generates most of their revenues on foreign markets, will probably not fill the state treasury at all on the basis of profit tax.
The positive and negative effects of such reform have not yet been sufficiently explored, however, as in the rest of the world, it will bring with it thinking about the kind of necessary changes.
