G7 tax reform could entrench global inequalities
The tax proposal decided at the G7 finance ministers’ meeting last weekend was hailed as “historic” and “transformative”. But in its current form, unfortunately it is neither. Major changes can and must be made – at least by the G20 where it will then be considered – if there is to be serious global tax reform.
The proposal is based on the recognition that the international tax architecture, designed for an earlier and very different era, contains anomalies that allow multinational enterprises (MNEs) to avoid paying the same tax rate that local businesses pay. . They do this through accounting procedures described as âBase Erosion and Profit Shiftingâ (BEPS), artificially shifting profits to low-tax jurisdictions to avoid paying higher taxes in those jurisdictions. countries where they actually operate.
There is an obvious way to solve this problem, and the Independent Commission for the Reform of International Business Taxation (of which I am a member) has advocated a unitary tax system based on formula pay-as-you-go. This means allowing each country to tax the global profits of multinationals, dividing the profits according to a formula based on sales, employment and capital, with a minimum overall effective tax rate of 25 percent. This would immediately remove any incentive for multinationals to shift their profits between different jurisdictions and lead to a massive increase in tax revenue.
The tax push of the US administration
Now that the Biden administration has recognized the possibility of a significant increase in tax revenue, hope for global tax reform has been renewed. Janet Yellen’s demand for a 21 percent minimum corporate tax, though still lower than ICRICT’s demand, was nonetheless a very positive gesture. The idea of ââa minimum overall rate is that countries can add additional taxes on the profits of their multinationals that face lower tax rates abroad. This must be done country by country, to avoid juggling the benefits between different jurisdictions to avoid this.
What’s even worse is that the G7 compromise does little for most developing countries, which are proportionately even bigger losers from foregone tax revenues.
The G7 compromise (in its “second pillar” of the tax proposal) led to a considerably lower minimum rate of “at least 15 percent”, close to the very low rates of tax havens like Ireland and Switzerland . It would also lead to a huge drop in tax revenue: EU Tax Observatory estimates suggest that forecast revenue for the European Union, for example, would drop from â¬ 167.8 billion at 25% to â¬ 98 billion. euros at 21% to only Euro 48.3 billion euros at 15%. For the United States, the forecast drop in revenue is from 165.4 billion euros at 25% to 104.4 billion euros at 21% to just 40.7 billion euros at 15%.
It is remarkable that G7 governments are prepared to forgo so much potential tax revenue that could usefully be used for large social and physical investments, simply because of the lobbying power of big business. Obviously, the public in these countries is either unaware or unwilling to demand a fairer outcome.
Developing countries lose out – again
What’s even worse is that the G7 compromise does little for most developing countries, which are proportionately even bigger losers from foregone tax revenues. For most developing countries, and for the world as a whole, the idea of ââunitary taxation of multinationals, with taxes distributed according to a simple and fair formula, is much more relevant. It is unfortunate that during the negotiations, the proposal of the Intergovernmental Group of 24 (G-24, body coordinating the position of emerging economies) of fractional allocation was not given due consideration.
Instead, the G7’s proposal is embarrassingly inadequate and would likely result in no real change. Since it has actively called for their removal, it is possible that the United States government only brought forward this question in response to taxes imposed on digital multinationals based in the United States in several other countries. Currently, other countries say they will agree to eliminate these taxes only after the United States has passed the relevant legislation internally, which is by no means certain.
In any case, the proposal is far from the unitary taxation proposal of the ICRICT. He suggests that governments should only be allowed to tax at least 20 percent of the profits made in their country by a multinational that makes global profits on a 10 percent margin (which they apparently defined as a âExcess profitâ).
Given the very limited changes in the G7 proposal, its wider reception as a huge step forward is truly a marketing triumph.
Such a notion of “excess profit” is bizarre – it is not used in any corporate tax system in any country. Since profits are already defined as the excess over all costs (including capital costs), this is clearly net income that should be taxed in the usual way, and indeed taxation should be progressive in order to capture the rents. The effect of this restriction, and the additional restriction to apply this new rule only to the largest multinationals, would be to significantly reduce the number of eligible companies (less than 200 companies). This would mean that developing countries would earn little or nothing in additional tax revenue.
Just a marketing triumph
Some details remain to be worked out. For example, how to define the tax base remains a thorny question. Ronen Palen argued that since this policy is based on accounting profits, it would still be easy for very large multinationals to avoid it and fall below the 10 percent threshold, including by splitting into separate companies. who operate in alliance.
It should be noted that Amazon, for example, may be exempt because its global profits are below the 10 percent margin, unless the new system includes segmentation to take into account only highly profitable segments ( like Amazon’s AWS). No wonder many digital giants like Apple and Facebook have already welcomed this proposal. In addition, there are already requests for exemptions for certain sectors, such as mining and finance.
Given the very limited changes in the G7 proposal, its wider reception as a huge step forward is truly a marketing triumph. And once again, unfortunately, the G7 have shown that they are not really leaders of the world, but leaders of a selfish group of powerful countries.
Read Dani Rodrik’s article âThe G7 Tax Repressionâ for an opposing point of view.