As if it were an auction to the highest bidder, for decades many governments have tried to minimize taxes on multinational companies to attract them to their territory.
And that competition has given companies a big advantage by leaving them in an excellent negotiating position that allows them to say, “Well, if you raise my taxes here, I’m going to another country.”
But if that other country, the side country and the country beyond have already agreed on a minimum tax rate… the rules of the game would be different.
With that in mind, U.S. Treasury Secretary Janet Yellen announced this week that her country supports the creation of a global minimum corporate tax to end “30 years of career down in corporate tax rates.”
The aim, he argued, is for the levy to favor “stable and fair tax systems”.
Immediately the governments of Germany, France and Spain, in addition to bodies such as the European Commission, held an announcement that could speed up the pace of negotiations on this subject which for almost a decade have failed to achieve a concrete outcome.
The International Monetary Fund was also in favour, which also proposed that countries “for once” implement a tribute wealth and higher incomes to support economic revival.
“I’m very optimistic., I think we can reach an agreement,” Grace Perez-Navarro, deputy director of the Centre for Tax Policy and Administration of the Organisation for Economic Cooperation and Development (OECD), tells BBC Mundo Grace Perez-Navarro.
1. What is it?
The proposal to establish a global minimum tax on multinational companies seeks to get countries to reach an agreement and commit to defining a tax floor, i.e. setting a limit to avoid too low tax collections.
So far, it has not been defined what that minimum tax rate would be.
Janet Yellen’s support for a “global minimum” is regarded by some experts as a “turning point” after years of fruitless negotiations. IMAGE SOURCE: GETTY IMAGES
Joe Biden’s government has proposed a minimum tax rate of 21%, a much higher figure than European countries had shuffled (ranging from 12% to 15%).
The idea of the “global minimum” is to stop competition between countries for offering lower taxes to large corporations.
In practice, governments could continue to set any tax rates, but then companies’ home countries could “top up” their taxes at the agreed minimum rate, eliminating the tax advantage of moving profits to a tax haven.
And the U.S. has raised the possibility of denying certain exemptions from taxes paid to countries that do not agree with a minimum rate.
Negotiations to achieve minimum taxation have been promoted within the OECD, the European Union and the G20 group of developed countries.
2. Why is it important?
Those who promote the minimum tax point out that it is a way to homogenize the international tax system, preventing corporations from changing their operations from one country to another in search of greater advantages.
At a time of economic crisis associated with the covid-19 pandemic, a tax system with fewer benefits for multinationals would allow governments to increase your tax collection.
German Finance Minister Olaf Scholz supported the U.S. stance, although he said the minimum rate amount should be agreed. IMAGE SOURCE: GETTY IMAGES
Increasingly, tax revenues come from intangible sources such as drug patents, software and other digital services that have migrated to taxation to tax havens.
That’s why many governments are calling for the creation of a tax framework that responds to new tax production, marketing and payment systems that have ceased to be constrained to national regulations for decades.
3. What do those who oppose it say?
But not everyone agrees to regulate globally the taxes paid by multinationals. Chris Edwards, Director of Tax Policy Studies at the Cato Institute in the United States, argues that just as competition between companies promotes efficiency, tax competition generates efficiency-friendly benefits between Countries.
“Inter-country tax competition is a good thing, it’s not bad, as Yellen says,” he says in dialogue with BBC World.
Without international competition, he adds, governments become monopolies.
“Yellen should know. To some extent, fiscal competition reduces the monopolistic power of governments,” he says.
It cites as a successful example the case of Ireland, a country that implemented a low-tax policy to attract businesses and managed to boost its economic growth.
4. Why did the U.S. now propose an overall minimum rate of 21%?
The global minimum tax is an essential pillar of President Joe Biden’s $2 trillion infrastructure spending plan.
To finance this plan, the representative has proposed raising corporate tax rates of United States at 28%. At first glance that increase does not appear to be directly related to the minimum overall rate.
These are indeed two different topics, but they are directly related.
Without a global minimum, the United States could go at a disadvantage compared to other major economies that have lower tax rates.
So what the White House is doing, experts argue, is playing two bands: one hike within their borders and one outside their borders.
Or at least from the point of view of the political message, the topic is installed on the agenda from that angle, argues Michael Moore, professor of Economics and International Affairs at George Washington University.
“It seems to be a strategy less risky to raise taxes,” he says in dialogue with BBC World.
Basically because the increase in corporate tax on businesses in the United States is an issue that Congress will discuss in the short term, while the idea of reaching a global agreement is something that has no set deadline.
5. How likely is an agreement to be reached?
Talks to create a minimum global tax began in 2013 under OECD leadership.
Until now, there had been little sign of concrete progress towards broad political agreement on the subject. But the strong backing given by the White House was received as a turning point. “It has to be this year,” says Grace Perez-Navarro of the OECD, who has worked on the issue since the initiative began.
“In political terms there are many countries that want to get an agreement,” he adds. And the White House message is a very powerful factor that can tip the scales.
Even G20 finance ministers made their commitment to try to reach consensus in July.
However, experts anticipate that Ireland to give a fight and that things will not be so easy with other European nations that offer large tax incentives to multinationals.
Corporate taxes in the 27 countries that make up the European Union vary greatly from 9% in Hungary and 12.5% in Ireland, to 31.5% in Portugal or 32% in France.
This wide range makes it difficult for all countries to agree on the same tax low for multinationals.
Doubts
The question of what strategies tax havens will apply to address this potential new scenario is also open.
Perez-Navarro explains that the OECD has proposed certain rules so that other countries can “exercise indirect pressure” those who continue to collect low taxes.
But there are researchers who are less confident that a global agreement will be reached.
“An agreement that is obligatory, that really makes a difference… I’m very skeptical“, says Moore.
“There are always incentives for governments to make trap“and end up playing by their own rules,” he explains.
Governments could eventually agree on a minimum rate, he adds, but they can create other incentives to attract companies such as exemptions, subsidies, credits, or any mechanism that eventually favors firms.
“They can create secondary policies that in the end change the effective rate that companies pay for,” Moore says.
A warning
For his part, World Bank Director David Malpass called on world leaders not to set a minimum overall tax rate for companies that is too high.
In an interview with the BBC, David Malpass said he did not want to see new rules that would hinder poor countries’ ability to attract investment.
World Bank Director David Malpass warned of U.S. proposed 21% rate too high. IMAGE SOURCE: GETTY IMAGES
And he responded directly to Yellen’s proposed 21% overall minimum rate: “Mand it seems... high”.
The global average corporate tax rate is about 24%, according to the Tax Foundation and the average in Europe is close to 20%.
The “great strategic change”
Despite the political and technical difficulties of such an agreement, there are economists who see this as possible, although they are not so sure that a final result will be achieved in 2021.
“If it is approved, would be historic”Ricardo Martner, a member of the Independent Commission for the Reform of International Corporate Taxation (ICRICT).
IMF Chief Economist Gita Gopinath expressed the agency’s support for the idea of establishing a corporate global minimum tax. IMAGE SOURCE: GETTY IMAGES
“It’s hard to reach a global agreement, but the big strategic change we see now is U.S. pressure for this to happen.”
The economist thinks there is a better chance of reaching consensus by 2022.
“If successful it would generate the elimination of tax havens“, you tell BBC World.
Any progress that is made, he adds, is another step towards a more equal future of the international system.
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