The author is Managing Director of the Tax Justice Network
After the resounding pledge by G7 finance ministers to major international tax reforms last weekend, the deal seems less clear. The subsequent withdrawal steps – from the UK’s hope of a funding waiver to China’s concerns over its special economic zones – were seen by some as a threat to the initiative. But this stampede is absolutely necessary – and even positive.
These will likely be the biggest reforms to international tax rules in a century. They can generate over a trillion dollars in additional income. Political commitment at the national and international levels is essential to achieve a fair result and to secure the commitment of the parties.
The OECD process to reform international tax rules has been underway since January 2019 and will likely end at the October G20 meeting. But the July meeting of the latter will be decisive in laying the foundations for an agreement on the scope and ambition of the new tax rights on companies (“pillar 1” of the reforms), and on the base and the global minimum tax rate (“pillar”).
The same issues arise for both: How large will the additional income be and who will receive it? And how far will countries’ national policies be constrained, and at what cost?
The first pillar is relatively small, but politically important. Public anger over the failure to tax multinationals centers on large tech companies that may outstrip the more heavily taxed local companies. The proposals by the G24 Low Income Group of Countries and the African Tax Administration Forum envisage distributing all global profits according to the location of multinational corporations’ business activities.
But the OECD reduced it considerably, and the G7 reduced it further. Now only 100 multinationals are likely to be affected, and only a fraction of their profits above a 10% margin will be attributed to their sales jurisdiction (without weighting for jurisdictions where employment takes place). The OECD estimates that this will generate additional revenues of $ 5-12 billion per year, a 2-5% reduction in the estimated $ 245 billion annual losses due to profit shifting.
The benefits of the second pillar are much greater. The OECD estimates that a global minimum tax rate of 12.5%, which would apply to perhaps 8,000 multinationals, could generate nearly $ 100 billion in additional revenue per year. Our estimates show that a minimum rate of 15% could bring in up to $ 275 billion per year. A rate of 21 percent, favored by the Biden administration, or a rate of 25 percent as recommended by the Independent Commission for the Reform of International Business Taxation, would increase much more.
The OECD approach favors the headquarters countries. This means that if a French multinational shifts its profits out of Brazil to take advantage of Bermuda’s 0 percent tax rate, it would be France that could “top” taxes on those profits to 15 percent. Since most of the largest multinationals are headquartered in OECD countries, the majority of the profits would flow to them. G7 members, who represent 10 percent of the world’s population, are expected to receive more than 60 percent of the additional income.
The alternative proposed by the Tax Justice Network, the Minimum Effective Tax Rate (METR), would distribute the profits under-taxed according to the location of the real activities of multinationals. They would be taxed at the national aggregate rate, rather than the agreed global minimum, in order to avoid an incentive for profit shifting. A rate of 15 percent would raise up to $ 460 billion in additional revenue. For the main members of the G20 outside the G7, the difference is glaring. At a rate of 15%, India could earn $ 13 billion instead of $ 4 billion; and China 72 billion dollars instead of 32 billion dollars. Additional income would double or even triple for countries like Brazil and South Africa.
Like China, many countries fear that the benefits of reduced tax abuse will undermine their ability to offer companies incentives to locate real activity. It is unlikely if the OECD insists on favoring the headquarters countries. Other states, like the UK, want to protect “their” multinationals, but fighting for loopholes would erode the benefits of cooperation.
The global minimum tax poses a serious threat to the business model of many jurisdictions, such as Ireland, with its average effective tax rate for US multinationals of just 2%. But the model is antisocial and unsustainable.
There is a big deal to be made. Basically, the reforms aim to renew fiscal sovereignty through greater cooperation. This requires global inclusion and transparent negotiations, which suggests that future tax reforms should take place under the auspices of the UN. In the meantime, G20 members have an opportunity to improve on the unilateral deal offered by a group of rich countries and lay the groundwork for a better deal that can stand.