Corporate Tax

A worldwide minimal corporate tax is a lift to international governance and a carbon tax

(LR) President of the European Council Charles Michel, US President Joe Biden, Japanese Prime Minister … [+] Minister Yoshihide Suga, British Prime Minister Boris Johnson and Italian Prime Minister Mario Draghi pose for the official welcome and family photo of the heads of state or government during the G7 Summit in Carbis Bay on June 11, 2021 in Carbis Bay, Cornwall.

Leon Neal – WPA Pool / Getty Images

Global governance received a boost from G7 leaders in Cornwall in early June when they passed a global minimum corporation tax (GMCT). The new levy, which has now been approved by 130 countries, sets a global minimum in corporate taxes that multinational corporations must pay in the jurisdictions in which they operate. It was drawn up and implemented in record time under the direction of the Biden government. from 2023.

The question is, can the GMCT serve as a model for global economic government in which developed and developing countries come together in a spirit of cooperation? Such a spirit has been hopelessly absent since the pandemic, as the G7 and G20 fight over vaccine supplies and economic aid to Africa. On the tax front, Europe signaled its impatience by going its own way in introducing a tax on digital services, which drew the ire of the Trump and Biden administrations. The digital filing is now on hold as the negotiators work out a global filing modeled on the GMCT.

What makes the GMCT a particularly attractive model is its simplicity and complexity. It is simple and easy to understand because it places an obligation on the corporate sector to be responsible taxpayers in the jurisdictions in which it operates. The GMCT deals directly with the so-called Pillar 1 problems, in which companies are required to pay national taxes due to their business activities in a country, regardless of whether they have a physical presence. While Pillar 1 is primarily aimed at the activities of American big tech companies (although it is more broadly applicable), Pillar 2 is broader in that it introduces the principle of a minimum effective tax rate that acts as a top-up when income is taxed under the GMCT .

Corporate taxation is of course characterized by the complexity and opacity that the GMCT seeks to address, but there will certainly be gray areas that allow past tax arbitrage practices. One such gray area, cited by experts, is generous tax incentives for investments in machinery provided by developing countries to attract and retain foreign investment. Under the new rules, such incentives are excluded, a great victory for developing countries like China and India.

Similarly, the financial sector was split off on the grounds that banks and asset managers already pay taxes in their jurisdictions. Early estimates suggest that the G7 nations, as the biggest creators of MNCs, will be a big beneficiary of the GMCT, while the gains for middle- and low-income countries are marginal at best.

Despite potential problems in implementing the GMCT, its design could be mimicked elsewhere for the introduction of similar levies. An agreement on a global carbon tax could embody the GMCT principles with a twist – pay where you pollute – but to get there would require a joint global agreement on the price of carbon. The IMF recently estimated that additional measures are needed at the global level by 2030 equivalent to pricing carbon of $ 75 per tonne or more, which would practically set a global floor like the GMCT.

The European Union is threatening to take a one-sided approach by proposing the introduction of a CO2 Boundary Adjustment Mechanism (CBAM), which would essentially impose high import duties on selected products from countries that are considered less ambitious to meet global climate targets follow. The CBAM could well be an attempt by the EU to force America (which has already sidelined the proposal) and other countries to a global agreement on a global minimum carbon tax.

As countries prepare for the November Glasgow Summit, they should take a close look at the GMCT. A global deal on the pricing and taxation of carbon emissions would turn the planet around in comparison to the more modest goals of the GMCT. Either way, it will prove or disprove that global collaboration is alive and well in the post-Trump era.

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