05.07.2021 – 09:43
Let us not be too judgmental: the agreement of 130 countries to reform international corporate taxation is a great moment. It is not often that a general global consensus is reached on something with such concrete consequences.
However, while congratulations are in order, the result is mixed at best. Here is the good, the bad and the ugly of reform.
First, the good. The agreement addresses the worst problems of international profit taxation. These derive from the principle that tax rights follow the domicile of corporate entities. This may make sense when added value arose from the production of physical goods. When value instead lies in intangible services and intellectual property, it is a recipe for abuse. It is estimated, for example, that 40 percent of “Investment” Global foreign direct investment is structured to lower taxes rather than for current business investment reasons.
Such invitations to play the system have not only meant that multinational corporations pay less tax than lawmakers also target them. Governments also set lower tax levels than they would have if they had not feared that those companies would transfer their profits elsewhere.
The deal counters this by introducing a global minimum corporate income tax rate of 15 percent and shifting the right to tax a portion of the profits from residence to place of sale.
Economists who have broken the numbers find that this makes a significant, if not destructive, change to the earth. A forthcoming report by EconPol researchers Michael Devereux and Martin Simmler estimates that tax rights for the $ 87 billion profit will be redirected to sales locations. The official Council of Economic Analysis of France (CAE) puts the number at $ 130 billion. At typical rates, this amounts to $ 20-30 billion in annual tax revenue.
The minimum tax, the CAE reveals, could increase corporate tax revenues by 6 billion to 15 billion euros each for France, Germany and the United States.
The result has somehow moved away from the previous focus on Big Tech. The political impetus came from European states outraged by the depreciating taxes paid by the US internet sector despite the huge revenue generated in their markets. As they unilaterally passed sales-based digital services taxes, they gave political impetus to global negotiations.
But economically, it never made sense to separate digital services. The wonders of intellectual property accounting allow multinationals to divert profits from extremely tangible goods and services, from coffee cups to taxi trips. The inclusion of all the major multinational corporations, a U.S. requirement, was thus an improvement on previous plans.
Now, the bad. The agreement only partially solves the problem. Very few multinational corporations are involved. Even at a minimum rate, most corporate profits will again be taxed according to the residence principle. Anomalies will also remain. The modest minimum rate leaves incentives to shift profits to low-tax jurisdictions (which therefore have little reason to complain). The deal will not get rid of the weak optics of belt-tightening governments and fraudulent tax mega-corporations, not once politicians start looking for ways to close record public deficits.
There are also special engravings for banks and natural resource companies. This can be justified for the latter; it makes sense to tax them where they extract hydrocarbons and minerals. For banks, the pretext is that they are regulated and taxed in the markets they serve. But if this were true, they would not be affected by the reallocation of tax rights. In fact, they had a lot to lose: Devereux and Simmler found that the redistributed tax base would be twice as large without destroying the bank.
Finally, ugly. Governments have missed an opportunity to simplify rules, leaving fertile ground for new and clever techniques to circumvent their purpose. Instead of shopping for scratches and thresholds, leaders could have negotiated the relative weighting of investment, employment, and sales in a distribution entirely based on the multinational corporate global earnings formula.
Over time, thresholds may decrease and exceptions may narrow. But not if this deal is taken to rule out any future changes. The US has asked other countries to withdraw digital unilateral taxes when the new rules are signed. This is only reasonable insofar as it does not block framework revisions.
This welcome process should not stop here. This was a big step for politicians to take. However, it remains only a first step for the global economy.
Translated and adapted for Konica.al by Financial Times