The author is chief executive of the Tax Justice Network
Following the G7 finance ministers’ headline-grabbing commitment to major international tax reforms last weekend, agreement is looking less clear cut. Subsequent moves for opt-outs — from the UK’s hope for a carve-out for finance to China’s concerns over its special economic zones — have been seen by some as threatening the initiative. But this jostling is entirely necessary — and even positive.
These are likely to be the biggest reforms of international tax rules for a century. They may generate more than a trillion dollars of additional revenues. Political engagement at national and international levels is critical to obtaining a fair outcome and ensuring commitment from the parties.
The OECD process to reform international tax rules has been running since January 2019 and will probably conclude at the October G20 meeting. But the latter’s July meeting will be pivotal in setting the basis for agreement on the scope and ambition of new taxing rights over companies (“pillar one” of the reforms), and on the base and rate for the global minimum tax (“pillar two”).
The same issues arise with both: how large will the additional revenues be, and who will receive them? And how far will countries’ domestic policies be constrained, and with what costs?
Pillar one is relatively small, but politically salient. Public anger over the failure to tax multinationals focuses on large tech companies that can outcompete more highly taxed local businesses. Proposals from the G24 group of lower-income countries and the African Tax Administration Forum envisage apportioning all global profits according to the location of multinationals’ business activity.
But the OECD has narrowed this substantially, and the G7 has narrowed it still further. Now only 100 multinationals are likely to be affected, and only a fraction of their profits above a 10 per cent margin will be apportioned to their sales jurisdiction (with no weighting for the jurisdictions where employment occurs). The OECD estimates this will bring in additional revenues of $5bn to $12bn a year, a 2-5 per cent reduction in the estimated annual losses of $245bn due to profit shifting.
The benefits of pillar two are much greater. The OECD estimates that a global minimum tax rate of 12.5 per cent, which would apply to perhaps 8,000 multinationals, could yield nearly $100bn a year in additional revenues. Our estimates show a 15 per cent minimum rate could raise as much $275bn a year. A 21 per cent rate, favoured by the Biden administration, or a 25 per cent rate as recommended by the Independent Commission for the Reform of International Corporate Taxation, would raise far more.
The OECD approach privileges headquarter countries. This means that if a French multinational shifts profits out of Brazil to benefit from Bermuda’s 0 per cent tax rate, it would be France that could “top up” the taxes on that profit to 15 per cent. As most of the largest multinationals are headquartered in OECD countries, the majority of the benefits would go to them. G7 members, with 10 per cent of the world’s population, stand to receive more than 60 per cent of the additional revenues.
The alternative proposed by the Tax Justice Network, the Minimum Effective Tax Rate (METR), would allocate undertaxed profits according to the location of the multinationals’ real activities. They would be taxed at the national headline rate, rather than at the agreed global minimum, to avoid incentivising profit shifting. A 15 per cent rate would raise as much as $460bn in additional revenues. For major G20 members outside the G7, the difference is stark. At a rate of 15 per cent, India could gain $13bn rather than $4bn; and China $72bn rather than $32bn. Additional revenues would double or even triple for countries such as Brazil and South Africa.
Like China, many countries worry that the benefits of reduced tax abuse could offset their ability to offer companies incentives to locate real activity. This is unlikely if the OECD insists on privileging headquarter countries. Other states, such as the UK, want to protect “their” multinationals — but competing for loopholes would erode the benefits to be had from co-operation.
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 per cent. But the model is antisocial and unsustainable.
There is a grand bargain to be struck. Fundamentally, the reforms are about renewing fiscal sovereignty through greater co-operation. That requires global inclusion and transparency of negotiations, suggesting that future tax reforms should take place under UN auspices. In the meantime, G20 members have the opportunity to improve upon the one-sided deal proposed by a group of rich countries, and set the basis for a better deal that can stick.