SYDNEY and KUALA LUMPUR, June 15, 2021 (IPS) – Last week, the largest rich countries, where most of the large TNCs are based, agreed on a global minimum corporate tax rate (GMCIT).
But the proposed low interest rate and other features will once again deprive developing countries of their fair payment.
New race down
On June 5th, the group of the seven largest rich countries (G7) agreed that all TNCs should pay GMCIT of at least 15%. That rate is just over half of President Biden’s promise to hit a US CIT rate of 28% during last year’s election campaign.
The G7’s GMCIT rate of 15% is also nearly 30% below Treasury Secretary Janet Yellen’s suggestion of 21%. Her proposal was aligned with Trump’s greatly reduced CIT rate rather than Biden’s 28 percent vow.
Incredibly, this cut was hailed as a “game changer” by the new head of the Australian Organization for Economic Cooperation and Development (OECD) and the British Chancellor of the Exchequer.
Many have called for a GMCIT, especially those who have long been concerned with reduced fiscal resources. In particular, the Independent Commission for the Reform of International Business Taxation (ICRICT) called for a 25 percent GMCIT to improve development finance.
On average, the official CIT quotas have fallen by 20 percentage points since 1980. In high-income countries, they fell from 38% in 1990 to 23% in 2018. In contrast, they have fallen from 40% to 25% in middle-income countries (MICs) and from over 45 to 30% in low-income countries (LICs). Despite these lowered rates, TNCs still minimize paying taxes.
Financial crisis forces tax reform
The current financial crises have lasted for decades. The tax counterrevolution of the last few decades has not only cut public spending but also tax revenues. Developments over the past twelve years have forced a sustained fiscal turnaround.
The global financial crisis of 2008 was overcome with massive financial bailouts and recovery measures. Declining tax revenues in earlier decades and their sharp decline during the Great Recession forced a rethink in politics.
Meanwhile, the weakening tax competition between countries is not taken into account. Now the pandemic has stepped up efforts to increase fiscal resources to fund contagion containment as well as economic relief and recovery.
The “Base Erosion and Profit Shifting” (BEPS) practices of TNCs are hardly new and have long had a detrimental effect on developing countries. Certainly all countries have lost a lot of tax revenues as a result of such practices.
TNCs use “trade mis-invoicing” – that is, “paper transactions” between affiliated companies – and “tax havens” to minimize the overall tax burden on their profits and revenues. As a result, the effective tax rates are even lower and many actually pay little.
In 2013, on behalf of the Group of Twenty (G20) of the largest economies, the OECD launched its BEPS project to reform the taxation of digital trade in TNCs (Pillar 1) and to propose a GMCIT rate (Pillar 2).
ICRICT estimates annual global revenue losses to be at least $ 240 billion, or 10% of global CIT revenue. Despite falling rates, CIT is still significant for government revenues with 13-14% of global tax revenue and 9.3% in OECD countries.
Between the devil and the deep blue sea
The OECD has long restricted international tax cooperation to regulations for its wealthy country members. The 12.5% minimum rate of the BEPS proposal would generate no more than $ 81 billion in additional revenue annually. Unsurprisingly, around 75% of the additional tax revenue envisaged would go to the rich Member States.
The main attraction of the G7 proposal is that it appears simpler than the OECD blueprints. If more TNCs were taxed than just a few large TNCs with win rates above 10%, CIT revenues would increase significantly. For Yellen, a minimum Pillar 2 CIT rate at around 8,000 TNCs would bring much more.
For the G7, host countries only have the right to tax 20% of the “excess profits” (over 10%) from the largest and most profitable companies. In the OECD draft, “residual” profit that is not taxed by the home country – headquarters or “source” country can be taxed by the host country.
The calculation and division of the excess profit will always be a matter of dispute. With home countries having the right to tax the “remainder” or the balance that is not taxed by host countries, developing countries no longer have any reason to offer tax incentives to attract FDI.
Both the OECD and G7 proposals favor TNC home countries, even if the host countries are the main source of profit. In addition, mechanisms for distributing “additional” tax revenues would mainly benefit the richest countries, where most of the large TNCs are located.
Incredibly, the location of TNC production or employment, often in developing countries, is irrelevant to the host country definition. With generally lower incomes, developing countries are relatively less significant as selling countries, with the exception of affordable consumer goods and services.
Rules for governance justice
Some governments are expected to request – and receive – exemptions to protect special interests, which further undermines the already humble G7 proposal, e.g. B. claims that Britain wants to exclude financial services. Some low-tax countries also cast doubts on the G7 proposal.
Meanwhile, tax justice activists have found the painfully obvious: the G7 minimum of 15% is too low – much lower than the average in most MICs and LICs and closer to the rates in tax havens like Singapore, Switzerland and Ireland. The quota reflects the interests and preferences of the G7.
Instead, the intergovernmental G24 group of developing countries is calling for the IMF and World Bank to give host countries greater priority. The G24 and the African Tax Administration Forum have also proposed various practical measures. This includes the formula-based distribution of the global profits of the TNCs across the countries, taking into account factors such as production and employment, not just sales.
An IMF policy paper also advocates a greater priority for LIC interests. It calls for a simpler system given its capacity constraints and the critical need to “secure the tax base for foreign investment”.
However, it is difficult to get a fair and effective result. According to the Tax Justice Network, a minimum rate of 21% would raise $ 640 billion more annually. Other tax justice activist proposals are generally fairer towards developing countries as well.
Running backwards downwards
The G7 has cut the GMCIT to 15%, close to the OECD’s suggestion of 12.5% and much lower than the 21% of Yellen, 28% of Biden and 25% of the ICRICT. However, the G20 could still reverse this downward trend, as it can decisively influence the outcome of the OECD BEPS Inclusive Framework.
One related option is to start implementing at a certain lower rate as soon as possible, with an irrevocable commitment to quickly increase the GMCIT rate to, for example, 25% on a given schedule.
Much remains to be done, much of it urgent. Developing countries can only seek tax justice on more neutral ground, provided by a truly multilateral forum, namely the United Nations, with the IMF providing the necessary technical assistance.
For now, however, the involvement of many developing countries, mainly MICs, in the distorted OECD BEPS IF needs to be urgently addressed to ensure that its outcome is not detrimental to their medium- and long-term interests.