Dear Mr President,
The world has welcomed your choice and commitment to re-establishing diplomatic engagement with the international community at the center of US foreign policy. By bringing governments together to create the conditions for an equitable and environmentally sustainable recovery of the global economy, your leadership can foster transformative change.
For too long, international institutions have not addressed one of the most toxic aspects of globalization: tax avoidance and tax evasion by multinational corporations. Fair taxation of multinational corporations is required to create the kind of societies we aspire to, and it must be a central part of any progressive tax system that aims to fuel economic growth and create high standards of living for all. Ending corporate tax avoidance is also one of the best ways to tackle widespread wealth and income inequality. By shifting their profits to tax havens, large corporations are depriving governments around the world of tax revenues of at least $ 240 billion a year. This deficit affects not only the United States, where around 50 percent of the profits made by US multinational corporations are remitted to overseas tax havens each year, but also the global South, where sources of income are more limited and therefore rely on corporate tax revenues for funding support public services are bigger.
As members of the Independent Commission for the Reform of International Business Taxation (ICRICT), we urge you to fulfill your promise to “make international efforts to bring transparency to the global financial system, to search for illegal tax havens, to seize stolen assets and It is harder for executives who steal from their people to hide behind anonymous front-line firms. “To this end, your administration should actively seek the revision of the international tax system to ensure fair taxation of multinational companies, which is currently being discussed in the context of the OECD process commissioned by the G20.
Unfortunately, these negotiations did not go well. The governments of leading member states (including the previous US administration) have negotiated on the false assumption that their national interest is best served by protecting multinationals based within their borders. Discussions about reforming international taxation have therefore sacrificed common ambition to the lowest common denominator. In the meantime, multinational corporations continue to avoid taxes that could help pay public spending in support of post-pandemic recovery. The world cannot afford that.
However, the negotiation process has resulted in an agreement that multinational companies should be viewed as one entity. This means that their worldwide profits should be taxed in each country in accordance with their actual activities. This is a well-known concept in the United States where corporate profits are mapped to different states on a formulaic basis according to the key factors that generate the profit: employment, sales, and wealth. However, the current proposal only applies this allocation criterion to a small fraction of a company’s global profits – especially those of highly digitized multinational corporations that are primarily based in the US.
E-commerce grew nearly a third during the pandemic, and it is critical that not just digital multinationals, but all digital businesses of multinationals pay their fair share of taxes. Therefore, an ambitious and comprehensive reform should be adopted to replicate the US system internationally without distinguishing between digital and non-digital companies. Such a rule would help level the playing field, reduce distortions, limit tax avoidance opportunities and provide security for multinationals and investors. This system should be supported by a global minimum tax on multinational corporations that end harmful tax competition between countries and reduce the incentive for multinational corporations to shift profits to tax havens. However, the minimum rate of 12.5 percent discussed in the OECD and elsewhere could become the global upper limit. If so, the laudable initiative of obliging multinational corporations to pay their fair share of taxes would do the opposite. Their campaign promised to raise the US minimum tax on foreign profits of US companies (known as “GILTI”) to 21 percent. This measure would not only have the advantage of increasing your country’s tax resources. It would also provide political support from policy makers in other countries to follow suit. An ambitious global minimum tax could change the fight against tax avoidance significantly. If the G20 countries agreed to levy corporate tax of at least 25 percent (as advocated by the ICRICT) on the global income of their multinational companies, more than 90 percent of global profits would automatically be taxed at 25 percent or more. Of course, it is also important that such a tax is designed in such a way that tax rights are fairly shared between the companies’ home and host countries.
Treasury Secretary Janet Yellen said at her confirmation hearing that your government looks forward to “working actively with other countries” to “try to stop a destructive global race for corporate taxation.” There is no evidence that the recent trend towards lower corporate tax rates has stimulated productive investment and growth. The 2017 US interest rate cut resulted primarily in funding dividend payments and share buybacks.
Corporate taxation is in fact a tax on pure profits, so lowering the tax rate has little effect on economic activity. In other words, corporate taxes are essentially a withholding tax on dividends and thus an income tax on the rich, as equity investments (directly or indirectly, for example through pension funds) are even more unevenly distributed than income. We ask you to ensure that the US is once again leading by example and working with other countries willing to undertake major reform that is just for the US and the rest of the world. Until such a just reform is passed, trade sanctions against countries that have already decided to tax digital companies – many of them are developing countries desperate to generate additional revenue – will be counterproductive. Reintegration into the multilateral system while accepting a weak international compromise on the taxation of multinational corporations will further undermine and fail to restore confidence in the system. It is in our power to build a more sustainable, collaborative and fairer post-pandemic world where multinational corporations pay the taxes they should be paying. The ICRICT is honored to assist your administration in achieving this vital goal.
José Antonio Ocampo, former Colombian Finance Minister and UN Secretary General for Economic and Social Affairs, is a professor at Columbia University and chair of the Independent Commission for International Corporate Tax Reform. Joseph E. Stiglitz, Nobel Laureate in Economics, is a full professor at Columbia University and a member of the Independent Commission on Reforming International Business Taxation. Jayati Ghosh, Executive Secretary of International Development Economics Associates, is Professor of Economics at the University of Massachusetts Amherst and a member of the Independent Commission on International Corporate Tax Reform.
© Project Syndicate, 2021
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