Europe is currently not only waiting for the formation process in the Netherlands, but is also watching what is happening in Germany with great interest. To look back on the Bundestag elections and look ahead to a new government, Public Matters spoke with Dominik Meier, managing partner at Miller & Meier, a public affairs and lobby consulting firm in Berlin. This week Public Matters is visiting Berlin, on the occasion of Public Matters’ 20th anniversary. All the more reason to reflect on the developments in public affairs and politics in Germany.

 

Elections

Meier describes how the floods of July 14 and 15 put climate change high on the political agenda. Yet it did not help the Grünen to the chancellorship. In the end, Olaf Scholz and his SPD rose above both the Grünen and the CDU/CSU. The focus on the ‘puppets’ was possibly even stronger in Germany than it was in the Netherlands. Meier therefore attributes the SPD’s victory to the professionalism of SPD leader Scholz and ‘mistakes’ in his opponents’ campaigns; to inaccuracies in Annalena Baerbock’s CV and a smiling Armin Laschet during a press conference on the floods in North Rhine-Westphalia. None of the three was very popular, but Scholz was given the benefit of the doubt, partly because of his role as Vice-Chancellor and minister of Finance in cabinet Merkel IV.

 

“The traditional people’s parties no longer exist” says Meier, reflecting on the fragmentation of the political landscape in his country. As in the Netherlands, a coalition must now be formed with several parties from the political center, where previously two parties could achieve a majority. This has implications for public affairs: increased diversity of political stakeholders creates a need for advice on forming strategic alliances and broad stakeholder approaches. There are simply more stakeholders involved in decision-making. The ‘traditional’ form of lobbying, where much depends on personal contacts, has had its day. According to Meier, this fits in with society’s need for more transparent politics and decision-making.

 

Societal role of the business community

Combating climate change is the main challenge of the next German government. After closing the nuclear power plants, the government must now start the ‘coal exit’; it was previously agreed that this must be done before 2038. The transition to a sustainable and circular economy must be made together with German industry. At the same time, an explosive increase in energy prices must be prevented so that the economy continues to run. In short, the parallels with Dutch public affairs issues are easy to recognize.

 

When asked whether much will change in the labor market under the leadership of a social democrat, Meier replies that this is unlikely. The choice for Scholz is a choice for continuity; Germans do not like change. Yet this change is needed in a number of policy areas. A Ministry for Digitalization, for instance, should increase the competitiveness of the digital economy by tackling challenges such as the rollout of the 5G network, the FDP proposed earlier.

 

To meet social and political challenges, the business community must position itself well. Meier underlines that portraying the role of business in society is becoming increasingly important for public affairs professionals. Communication with politics and society is essential: “social media are increasingly playing a role in and are more important than ever in the interaction between politics, society and business”, Meier said.

 

European Union

The dossiers at the European level remain largely stagnant as long as the formation process is underway – after all, Merkel’s cabinet is outgoing, leaving important policy measures on climate, digitalization and taxation to a new government. Broadly speaking, more continuity can be expected on European foreign policy. Scholz is in favor of more fiscal intertwining of EU member states. However, cooperation with the FDP probably means restraint in the areas of taxation and debt sharing, a position that is well received by the Dutch, Meier knows. Government participation of the Grünen means a more ambitious climate policy. For the French presidency of the EU, which starts in January, the political support of the Germans is necessary to make an impact on issues such as EU integration and climate change. A successful formation process is therefore important for progress on European policy dossiers.

 

The formation process

Meanwhile, this formation process has already begun. Here the FDP and the Grünen play a major role; they act as a block and have already entered pre-coalition talks with the SPD. Meier considers this coalition, the ‘traffic light’ coalition, the most likely. The chaotic situation within the CDU/CSU, with Laschet recently hinting at resigning, makes a ’Jamaica’ coalition unlikely. In doing so, Meier says that the CDU/CSU is “the loser” of the elections and therefore they need to work on a new narrative. For the voter, it is currently difficult to recognize which issue the CDU/CSU ‘owns’ according to Meier: “because if you choose climate policy, you vote for the Grünen, if you are for free trade, you vote for the liberals, and for anti-migration for the AfD.”

Photo by Noppasin Wongchum

In a month’s time, on 9 July, the G20 summit will take place in Venice, where among other things the world’s major economies will discuss a global upgrade of tax rules, with one sector in particular in mind: the tech sector.

In the summer of 2020, EU Member States saw that the economies within the European Single Market would be facing a very difficult time. The COVID pandemic significantly reduced earning capacity, making a comprehensive European recovery plan necessary. To generate the financial resources for this, the Member States decided to call on the European Commission to come up with a plan for a ‘digital levy’. Almost a year later, on 14 July, the Commission intends to publish a proposal: a levy on digital services, which will serve to help getting the Europe’s economies back on their feet. This is a big ambition coming from the Council and the Commission, but how realistic is it? What will such a levy look like, which companies and services will be affected, and how does it relate to the ongoing G20/OECD negotiations that should come to a climax in early July?

 

Scan

As for the exact form of the levy, the Commission is keeping its cards close to its chest. Directorate General TAXUD – responsible for direct taxation – is currently working with preparatory consultations and impact studies. The latest plans show that the Commission is exploring three options:

• an increase in the corporate tax rate for all companies carrying out certain digital activities in the EU;
• a tax on revenues from certain digital activities in the EU
• and/or a tax on digital transactions between companies within the EU.

The first option thus focuses on companies themselves, as regards to the the second it is not clear which digital activities are involved, and the last option would come close to a so-called ‘digital services tax’ (‘DST’): a tax on digital services similar to the ones levied at national level in e.g. France, Italy and Spain.

Judging from the many position papers submitted on this subject, the current patchwork of national variants of a DST is criticised by most companies. Besides the administrative burden, national DSTs still pose the threat of trade tensions (e.g. retaliatory import tariffs from the US). European harmonisation of such taxes can replace the patchwork. However, the majority of the business community would prefer the Commission to abandon its own initiative and focus entirely on a global solution. A European levy is seen as an extra tax anyway, and smaller tech companies fear that the big tech players will pass a European digital levy on to them.

A solution at a global level? The plans for this have been under negotiation at the OECD (Organisation for Economic Cooperation and Development) for some time.

 

What will the OECD do?

In a nutshell, the OECD has a plan with two pillars. Pillar 1 consists of new rules on where to pay tax and a fundamentally new way of sharing tax rights between countries. The goal is ‘that digitally-oriented and consumer-focused multinationals pay tax where they operate sustainably and significantly, even if they don’t have a physical presence in a country.’ In other words, even if a tech company does not have a physical presence in a country, it should pay tax in the country where consumers (e.g. app users) are located. The second pillar provides for the introduction of a global minimum tax. The first pillar really addresses the big tech companies: the new method allows governments to also tax the sale/trade of data (e.g. from consumers).

The OECD negotiations have been going on for years, but there is light at the end of the tunnel. Since January, the Biden administration, through Janet Yellen, US treasury, has been hinting time and again that the US is willing to abandon Trump’s hard line on this issue. The price Europe might pay for this is a deal that it not only taxes the Silicon Valley giants but also European ‘champions’ like Volkswagen.

A preliminary agreement was already reached at the G7 in early June. The focus of the first pillar should be on large multinationals with a profit margin of 10 per cent or more. Those companies would have to pay tax on 20 per cent of the profits they make above the 10 per cent threshold in the countries where they generate the income. This proposal would replace the OECD scope that included only “automated digital services” and “consumer facing businesses” as mentioned above. The thresholds for determining businesses that are the largest and most profitable are not clear yet. The second pillar is the 15 per cent corporate tax rate.

The G20 summit in July must agree to the plans. Countries such as India and China must also agree to the plans. The European Commission said in January that its initiative should not interfere with the G20/OECD negotiations. Benjamin Angel, director of direct taxation at DG TAXUD, stressed that the Commission’s proposal has a “different narrative” from the OECD negotiations, and the Commission maintains that a tax can be designed to be compatible with any outcome of the OECD negotiations.

So a European tax would have to run parallel to the OECD outcome, and see what happens if it is up to the Commission. The Berlaymont sees a window of opportunity….

 

Momentum

The European Parliament is also feeling momentum. An earlier Commission proposal in 2018 was shot down by member states in the Council, to the dismay of an increasingly ambitious Parliament. The need for economic recovery, as well as an increasingly vocal call to crack down on tax havens, gives the Parliament the necessary leeway to push its agenda. The Parliamentary Committee on Fiscal Affairs (FISC), established in 2020 and led by MEP Paul Tang (PvdA/S&D), also took a position on a possible digital tax last April. Rapporteurs Andreas Schwab (CDU/EPP, and also rapporteur for the Digital Markets Act) and Martin Hlavácek (Czech Republic/Renew) wrote in this position that if there is no G20/OECD agreement’, the EU should indeed take the initiative itself. MEP Tang went even further by stating that ‘if not a European digital tax, it should be a variety of national digital taxes. This is the way to put pressure on the international negotiation”.

The theme is also gaining attention in The Hague. Before the general election, the House of Representatives adopted the motion by MP Paternotte, which called on the government to work on a digital services tax at the European level. The election programmes of GroenLinks and PvdA even expressed the wish to introduce a national DST for the Netherlands. For the time being, there is no majority for this.

 

Consequences

The characteristics and preconditions of a digital tax are institutional food for thought for EU junkies: the competence for taxation lies entirely with the Member States themselves – not in Brussels. Any proposal on taxation would therefore requir a unanimous vote in the Council, and it is still unclear whether countries such as Ireland and Luxembourg – which is home to many tech giants with tax breaks – will agree.

The consequences of any European levy will have a significant impact on companies in the tech sector, which are, almost without exception, international players. Regardless of the outcome of the G20, policymakers in Brussels, The Hague and other European capitals will be gearing up for tough political and technical negotiations, and it will become increasingly important for many companies to make themselves heard.

Public Matters advises companies and other organisations that are active in the tech sector, or which are indirectly / directly impacted by a digital tax. Please visit this page for more information.

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