Corporate Tax

Company tax treaty an enormous step ahead for world justice

Multilateralism has been on the defensive in recent years. In a global environment that is more multipolar than multilateral, competition between states now seems to take precedence over cooperation.

However, the recent global deal to reform international corporate taxation is welcome evidence that multilateralism is not dead.

But it’s not healthy either. While globalization has continued during the Covid-19 pandemic – albeit more unevenly than before and despite people’s feelings of increasing isolation – interdependence is increasingly conflictual. Even soft power becomes a weapon, vaccines, data and technology standards become instruments of political competition.

The world is also becoming less free. Democracy itself is under attack amid a bitter narratives battle over which political and economic system can best deliver its citizens.

The EU continues to believe in and advocate a predictable world of rules-based multilateralism, open markets, positive outcomes, and social justice and solidarity.

We remain convinced that today’s challenges – from fighting the pandemic to combating climate change – can only be mastered through global cooperation. The EU will therefore continue to lead the way in revitalizing rules-based multilateralism to show our citizens the tangible benefits of a seemingly dry, technocratic approach.

Because the alternative to such a multilateral engagement – “going it alone” – means restricted access to vaccines, inadequate climate protection, exacerbating security crises, insufficiently regulated globalization and increasing global inequality. No country, not even the largest, can be successful on its own. For all these reasons, Italy rightly placed multilateralism high on the agenda of its current G20 presidency.

However, it is not enough for the EU to emphasize only its multilateral references. Europe must show that multilateral action benefits everyone when every country invests in it. And that is exactly what the new global tax treaty does.

The agreement, approved by G20 finance ministers in early July and supported by 132 countries, will set a minimum global tax rate of at least 15% for multinational companies and ensure that these companies pay taxes in the countries where they generate their profits. This is a historic step towards a fairer globalization and a milestone for effective multilateralism.

In recent years, governments have taken important steps to combat tax evasion by individuals. According to the OECD, the automatic exchange of tax information between countries generated 95 billion euros in additional tax revenue for the G20 countries between 2009 and 2019, while deposits in tax havens fell by 34%.

But curbing tax avoidance by multinational corporations, an even bigger problem, has proven to be more difficult. The OECD estimates that multinational corporations’ tax avoidance results in global revenue losses of $ 100-240 billion per year, or 4-10% of total corporate tax revenue.

Furthermore, the current international corporate tax system was designed more than a century ago and is increasingly out of whack with today’s globalized and digitized economy.

Worldwide corporate tax rates in 2020, according to the independent tax policy non-profit organization Tax Foundation.

The EU has long sought a global response to this challenge. But it was only the constructive commitment of US President Joe Biden’s administration over the past six months that made the latest breakthrough possible. This was a striking and welcome sign of America’s return in support of a multilateral vision of the world.

The 132 jurisdictions that currently support the new corporate tax treaty account for 90% of global GDP. While the deal alone will not fully solve the problem of tax avoidance by multinational corporations, it is a decisive step forward.

It marks the beginning of the end of the global race to the bottom in corporate tax rates, a competition that has produced some very rich winners but also billions of losers who may now begin to believe in the power of the rules again.

The deal will lead to higher and more stable government revenues at a time when all countries must bear the costs of fighting the pandemic and mobilize the investments needed to tackle the climate crisis.

And it will bring more justice at a time of increasing inequalities between developed and developing countries.

The most recent tax treaty in particular shows how multilateral action can promote a fairer form of globalization. We now need similarly effective international responses in other areas, from access to vaccines and the climate crisis to data security and technology standards.

Future generations will not forgive us if we waste the most important lesson of the pandemic – that we are in it together. We need smart strategies and bold tactics to achieve a truly multilateral agenda for all.

  • Josep Borrell, EU High Representative for Foreign Affairs and Security Policy, is Vice-President of the European Commission for a Stronger Europe in the World.
  • Paolo Gentiloni is EU Commissioner for Economic Affairs and former Prime Minister of Italy.

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