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Justice? Almost. The Global Minimum Tax Bill


Following a virtual meeting, the 130 countries that make up 90% of the world’s economy have agreed to support the global minimum tax bill. Though the tax framework is yet to be agreed upon, details and implementation will be finalised in October.

What is in the deal?

In June, G7 leaders had initially struck a historic multilateral agreement on a new corporate tax minimum. There are two pillars of the deal: firstly multinational companies will be required to pay tax where they do business.

Secondly, the minimum corporate tax rate of ‘at least’ 15% will be imposed in each G7 nation where multinational companies do business. The deal was then further discussed and agreed upon in the G20 meeting of finance ministers.

The original agreement made between the G7 has now received wider backing from 130 countries including the G20.

This deal has sprouted from governments’ desperation to reduce the immense government debt from the level of fiscal stimulus used to combat the pandemic.

It is the first step of a long-time coming effort to reform international tax, initiated with the OECD’s publication of ‘Base Erosion and Profit Shifting’ back in 2013.

Why is this relevant?

Companies currently benefit from profit shifting, which is claiming that the profits made in one country where corporation tax is high, in another country where corporation taxes are lower.

It is important to note that this is certainly legal, but it unethically reduces tax revenue in countries with higher tax rates.

This results in losses for the global economy in terms of corporation tax revenue, as by profit shifting many large multinational corporations pay less tax.

Credit: Tax Foundation

This has spurred ‘the race to the bottom’ in which governments are undercutting one another’s taxes to attract the profits of big corporations.

Nevertheless, the countries with lower corporation tax are able to benefit by attracting FDI, which bolsters economic growth in their respective country.

What do world leaders think?

This new deal has been met with widespread praise from world leaders. Janet Yellen states that the bill will “ensure fairness for the middle class and working people in the US and around the world”.

Additionally, the German Finance mister Olaf Scholz states that the deal is “tax justice…and bad news for tax havens”. The deal is also being oddly welcomed by corporations themselves – Nick Clegg declared that Facebook wants “the international tax reform to succeed.”

This raises the question: why has it received a warm reception by large corporations? Perhaps because corporations see it as a way to upkeep their ESG push and façade of ethicality.

Nevertheless, the deal has also been met with backlash as nine out of the 139 countries in the negotiations have refused to sign. These include low tax jurisdiction areas such as Ireland, Hungary and Estonia, all of which have experienced economic success through low corporation tax.

The global minimum tax forces the largest multinational tech giants to pay their fair share of tax in the countries that they operate in and make sales. Being able to raise more tax revenue from the likes of Apple, Google and Facebook will result in an increase in corporate tax revenue for governments.

In fact, in future, the largest global corporations would have to allocate 20% of their global profits to the countries where they make their sales, and companies will have less incentive to declare profits in tax havens or low tax jurisdictions.

However, the projected increase in revenue for high tax jurisdictions are marginal. The agreement among the 130 countries ensures that the largest companies will pay a mere $100bn per year in taxes.

To pronounce the death of the tax havens would be a premature move, particularly because the details of the tax bill are yet to be decided upon. Even so, we can perceive their twilight.

There will eventually be no incentive for companies to put sales through low-tax locations, as this agreement taxes companies where they have sales, not solely where they are based. Once the deal is finalised and comes into force, we will likely see a decline in tax havens such as BVI and the Cayman Islands.

Developing countries that rely more heavily on corporate tax income as a source of government revenues will be among the biggest losers.

Under the new deal, developing countries with low taxes are likely to experience reduced government revenues. They will also experience a loss of foreign direct investment (FDI), as the industry that the corporations bring may decline.

Image: Statista

Countries such as Ireland – where much of the economic success has come from its 12.5% corporate tax level and has attracted several multinationals – are now set out to lose.

This is because they will no longer be able to differentiate themselves and attract business by having a low corporate tax.

Concluding Thoughts

There is not always a fair, level playing field.

Countries that have hitherto been able to attract FDI and gain industry through low corporate tax will no longer be able to; countries with low tax often required this to improve their economy.

Therefore this new tax does not exactly represent “tax justice” or a “step towards a fairer and more equitable society.”

This deal is the beginning of the end of the offshore profit shifting. The agreement will make it more difficult for multinationals to artificially shift profits offshore.

The marginal gain that rich countries make from this new tax will be offset by the losses made by the low tax jurisdictions.

Thus, this deal is not “foreign policy for the middle class” globally, but just for those in rich countries.

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