Efforts to close loopholes exploited by multinational corporations (MNCs) to reduce their tax bills came to a head on June 4-5. At a meeting in London, G7 finance ministers agreed to commit to a global minimum tax of at least 15% on a country-by-country basis.
At a news conference after the meeting, US Treasury Secretary Janet Yellen said: “For too long there has been a global race to the bottom in corporate taxes, where countries compete by lowering their tax rates” rather than focusing on the wellbeing of their citizens and natural environments.
“The G7 has taken significant steps this weekend to end the existing harmful dynamic, making commitments today that provide tremendous momentum towards achieving a robust global minimum tax at a rate of at least 15%,” she added.
The G7 agreement comes after the US published its ‘Made in America’ tax plan in April, aimed at removing incentives for US companies to offshore investment, reduce profit shifting across borders and create tax preferences for clean energy production. The IMF estimates that the use of tax havens costs governments $500bn to $600bn in lost corporate tax revenue each year.
Experts are optimistic the proposals could lead to an agreement on long-running talks to reform global taxation under the auspices of the Organisation for Economic Cooperation and Development (OECD). But questions remain over the impact on tax-based incentives used to attract investment and whether it is more aligned with the interest of the US and other advanced economies.
Renewed impetus
The US originally proposed a global minimum effective tax rate of 21%, but reduced this to at least 15% to gain support from dissenting countries. This has given new momentum to the negotiations between 139 countries promoted by the OECD within the context of its Global Anti-Base Erosion (Globe) initiative, which calls for the introduction of a global minimum tax for MNCs.
Pascal Saint-Amans, OECD head of tax policy and administration, tells fDi that he is “positively impressed” with the US proposal and that it aligns with the OECD’s existing work on reforming the global tax system. “The big winners of globalisation, the largest most profitable companies, now all include the big tech giants, which would be significantly impacted by the reallocation of taxes under these proposals,” he clarifies.
The “race to the bottom” cited by Ms Yellen has seen the average headline corporate tax rate in advanced economies fall from 32% in 2000 to just over 23% by 2018. In 2018, the US collected among the lowest corporate taxes, as a proportion of GDP, across all 37 OECD countries. Omri Marian, a law professor at the University of California, says that the US proposal “really changes the dynamic” of efforts to make MNCs pay their fair share.
But others question whether the idea of a global minimum tax is mainly aligned with interests of countries such as the US, which are willing to recover some of the fiscal revenues their MNCs currently pay overseas, while reducing the space for other countries to pull the fiscal lever to attract investment and boost competitiveness.
“It seeks to end the use of [low-tax] jurisdictions by US-based MNCs and [only] some foreign corporations,” said Suranjali Tandon, assistant professor at the National Institute of Public Finance and Policy in New Delhi, at a roundtable hosted in June by GLOBTAXGOV, an EU-funded research project at the University of Leiden in Belgium.
In 2018, seven out of the top 10 locations for US MNC profit were tax havens, namely Bermuda, the Caymans, Ireland, Luxembourg, the Netherlands, Singapore and Switzerland, according to the US Bureau of Economic Analysis. These seven tax havens housed more US MNC income than the combined total of China, India, Japan, France, Canada and Germany.
Misaligned interests
Even with potential kickback from developing countries and low-tax jurisdictions that see a global minimum tax misaligned to their interests – for example, Ireland, which has a headline rate of 12.5% – the convening power of the world’s biggest economies may suffice.
“The [US] plan doesn’t need 190 countries to fully cooperate,” says Mr Marian. “If the 20 largest economies join this global tax initiative, that will cover most of the capital in the world, and give a strong incentive to other countries to charge the minimum rate.”
However, without many developing countries involved in OECD negotiations, many worry that their interests will not be reflected. “Developing countries are at a disadvantage due to many historical factors when it comes to attracting investment into their territories,” said Natalia Quiñones, a partner at Colombia-based boutique tax law firm Quiñones Cruz Abogados, during the GLOBTAXGOV roundtable. “Tax competition is not ideal, all else being equal. But everything is not equal,” she added.
What would the plan mean for FDI?
Although it raises many concerns, the global minimum corporate tax could have a profound impact on MNC strategies as it is meant to discourage MNCs from using subsidiaries in low-tax countries to shift income generated from intangible assets – such as patents, software and royalties on intellectual property.
Emmanuelle Deglaire, an associate tax professor at EDHEC Business School, says the global minimum corporate tax would create “tax neutrality” and reduce the incentive for MNCs to shift profits, while Mr Saint-Amans asserts that putting an end to the race to the bottom, tax havens and low tax schemes “would be beneficial to both the source and resident countries [of FDI]”.
Meanwhile, Mr Marian contends that the tax’s successful implementation would lead to a decline in MNC after tax profits, but it is unlikely to curtail investment plans. “If implemented, I don’t think [the global minimum tax] will depress real investment, but will target corporations shifting their intangible profits to low-tax jurisdictions. The corporations affected by these proposals are so profitable that I doubt it will have any discernible effect on cross-border investment,” he says.
