Is an international corporate minimum tax the right solution?
An international agreement that addresses only one-quarter of the problem suggests that the alleged “solution” is far less effective that the hype surrounding it
By Anil Madan
On July 1, the Organization for Economic Development (OECD) announced that 130 member countries had joined a new “two-pillar plan to reform international taxation rules” aimed at ensuring that multinational enterprises pay a fair share of tax wherever they operate.
The OECD crowed about the fact that the 130 signatory countries represent more than 90% of global GDP.
In a passing comment, the OECD allowed as how the remaining elements of the framework, including the implementation plan will be finalized in October. In other words, we have simply an “agreement” in principle, with the details to be fleshed out.
Global minimum tax. Pic – swordstoday.ie
One other aspect of the OECD’s announcement is not clear. Its statement appears to play down the fact that the arrangement or “two-pillar solution” addresses challenges “arising from the digitalization of the economy.” It remains to be seen if the arrangement addresses more than digital or e-commerce.
The OECD tells us that the two-pillar package is the outcome of an almost decade-long negotiation and it “aims to ensure that large Multinational Enterprises (MNEs) pay tax where they operate and earn profits.” In other words, the taxes are likely to be levied roughly in proportion to each country’s share of GDP. This is evident from the OECD’s explanation that there will be a “fairer distribution of profits and taxing rights” among countries with respect to the larges MNEs because there will be a reallocation of taxing rights over MNEs from their home countries to the markets where they have business activities and earn profits regardless of whether the companies have a physical presence in such markets.
Not surprisingly, both the US and China signed on. Given that these two countries enjoy a disproportionately large share of the world’s GDP, reallocation of taxing rights to jurisdictions where business activities are conducted or profits are earned has the potential to afford them a large share of revenue from this arrangement. The US and China are not the only likely beneficiaries of such reallocation. Indeed, the top ten countries account for almost 60% of the world’s GDP.
Since China is often thought to be more a producer than a consumer nation in terms of its contribution to world GDP, one might expect that the profits of MNEs in China may not match that nation’s share of world GDP. But such a view would mask the increasing importance of Chinese suppliers in the global market. For example, Marketplace Pulse data shows that on Amazon, 50 percent of all global sellers are based in China.
These sellers use Amazon’s US-based warehouses, so the items are shipped domestically in the US. Chinese sellers make up almost 65% of all sellers on Amazon.es, the company’s Spanish retail website. More than 50 percent of Amazon’s French, Canadian, and Italian sites are Chinese sellers.Amazon’s US website consists of 44 percent Chinese sellers. China is a force in e-commerce.
The OECD states, as have representatives of the US and other G-7 countries, that the purpose of this “reform” is to introduce a global minimum corporate tax rate that will limit competition over corporate income tax and provide some protection for the tax bases of countries that do not wish to engage in a race to the bottom when it comes to corporate taxes.
So what is at stake here? The OECD tells us that taxing rights on more than 100 billion USD of profits are expected to be reallocated to market jurisdictions each year. The global minimum corporate income tax, based on a minimum rate of 15%, is estimated to generate around $150 billion in additional global tax revenues annually. In other words, roughly $1 trillion in corporate profits are at issue here (15% of $1 trillion = $150 billion).
But this seems to be a tempest in a teapot. Looking at the US alone, and considering its approximately 20% share of global GDP, a strictly pro-rata allocation of these additional tax revenues would generate some $30 billion out of the total of $150 billion. Against a pre-pandemic annual budget of $3-4 trillion which has now grown to $6.6 trillion with stimulus spending, that seems a pittance.
The real agenda here may be different. If we consider that a worldwide minimum tax is likely to become a de facto maximum tax, the additional revenue generated for the US seems hardly worth the trouble. A hidden agenda here is possibly a desire to prevent additional levies on America’s corporate behemoths by countries looking for additional revenue. For example, France has sought to levy a 3% tax on digital companies for their commercial sales including on the sale of data.
One clue that such an agenda might be at play is OECD Secretary-General Mathias Cormann’s admission that this new arrangement does not eliminate tax competition, but sets multilaterally agreed limitations on it.
Some additional perspective is in order. The largest multinational companies notoriously enjoy very low effective tax rates. These companies have long used creative but legal ways to shrink their tax bills. One is to book profits from customers in the US or Germany, as if they came from a tax haven such as Bermuda, whichhas no corporate income tax. At the recent G-7 summit, the world’s richest economies agreed jointly to pursue a revamp of the global tax system that would undercut the effectiveness of such a strategy.
The idea behind the accord among the G-7 nations—Canada, France, Germany, Italy, Japan, the UK and US —is to support the outlines of a new global tax system that will change how much corporations pay, and to whom. A worldwide minimum corporate tax rate of at least 15% would reduce the attractiveness of tax havens. And huge technology companies such as Amazon, Facebook and Google — which can sell their digital products in countries without establishing an easily taxed physical presence — may see some of their taxes paid based on where those sales occur. Countries where big firms operate would get the right to tax “at least 20%” of profits exceeding a 10% margin, according to a G-7 communique. As the OECD announcement states, key details are still to be nailed down, and the first step was to get more nations to sign on.
In a scenario sketched out in a paper for the Atlantic Council by Jeff Goldstein, a former assistant on the White House Council of Economic Advisers suggested that the tax approach would work thus: A company headquartered in Country A is reporting income in Country B, where the rate is 11%. With a global minimum rate of 15% in effect, Country A would “top up” the tax and collect another 4% of the company’s profit from Country B — representing the difference between Country B’s rate and the global minimum rate. That undercuts any advantage of shifting to lower-tax places and pressures countries to conform to the global norm.
The International Monetary Fund has cited estimates suggesting that corporations exploiting tax havens cost some $500 billion to $600 billion in potential corporate tax revenue to be lost every year. Note that this total is three to four times the revenue capture of $150 billion projected by the OECD in its recent announcement that 130 countries have signed on to an agreement in principle to establish a worldwide minimum corporate tax rate of 15% on profits.
The UK’s Tax Justice Network, advocating for a fairer tax system, points to the British Virgin Islands, Cayman Islands, Bermuda, the Netherlands and Switzerland as the leading jurisdictions most complicit in helping Multinational Enterprises(MNEs) to avoid the full impact of corporate income tax.” Recently, US Treasury Secretary Janet Yellen, who endorsed the proposed global minimum rate, said that the goal is to end a “30-year race to the bottom on corporate tax rates.” This is the same sentiment echoed in the OECD announcement.
If the IMF’s projected numbers are correct, an international agreement that addresses only one-quarter of the problem suggests that the alleged “solution” is far less effective that the hype surrounding it.
* Published in print edition on 9 July 2021
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