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Over two years have passed since more than 135 countries signed up to the idea of a global minimum corporate tax rate for big multinationals. This week, a critical mass of several dozen countries, including many of the world’s largest economies, has begun to apply the new rules. Even though the US and China are not among them, this is a big step forward in ending the “race to the bottom” on corporate taxation, and the disruption to fair global commerce caused by tax havens. It also provides a potential model for other initiatives to be adopted by coalitions of the willing.
From January 1, countries including all of the EU, the UK, Australia, South Korea, Japan, Canada and Norway are applying an effective tax rate of at least 15 per cent on profits of multinational companies with annual revenues exceeding €750mn. Several countries long viewed as havens by international business are taking part, including Ireland, Luxembourg, the Netherlands, Switzerland and Barbados.
A series of interlocking rules, expanding over time, means that if a big company is taxed below the global minimum in one country, other countries can charge a top-up tax levy — so neither the tax haven nor the company benefits from the lower rate. That creates a robust incentive for non-participating nations to join up, or watch other countries collect tax at their expense. The OECD, the driving force behind the initiative, estimates it will increase global annual tax revenues by up to $220bn, or 9 per cent — vital extra proceeds for governments struggling to fund ever-expanding needs from public services to defence.
It is highly regrettable that the world’s two largest economies have not introduced legislation to implement a deal that both backed in 2021. The Biden administration, whose treasury secretary Janet Yellen was a vocal proponent, has not been able to get the plan through Congress. Many Republicans are staunchly opposed. Some business lobbies warn that the way some important US tax credits, such as for R&D, operate could reduce companies’ effective tax rate under the international rules and make them liable to top-up demands abroad. But many tax experts believe even a future Republican administration would ultimately be more likely to adapt US rules to the reality of the global convention — in a broader review of tax legislation due in the next couple of years — than to completely blow it up.
The initiative’s smart design also lessens the impact of America and China’s absence. It shows it is possible to incentivise good behaviour without unanimous agreement. That suggests similar coalitions may be able to make progress in other areas, such as carbon border adjustments, where global consensus is hard to secure.
There are wrinkles. Previously low-tax jurisdictions such as Ireland that raise their rate will initially receive revenue windfalls — though offset, over time, by the loss of their tax advantage. Such countries may be tempted to lure multinationals in other ways, such as through permitted tax breaks or subsidies, which will require clear and careful policing.
Most of the gains from the initiative, moreover, will go to advanced economies. The other half of what was a two-pillar deal — getting multinationals to pay more tax in countries where they have sales and profits but little physical presence — would benefit the developing world more. Although the OECD published a text of the multilateral convention in October, progress here has been slower — and since many of the multinationals in question are western, it would need to be ratified by EU countries and the US Congress to be fully effective. But if the global corporate taxation system is to become fit for the 21st century then this initiative, too, needs to move from agreement in principle to finally being implemented.
Source: Economy - ft.com
