“Since the 1980s, countries have been competing for companies by lowering corporate taxes. Some countries like Ireland and Bermuda have introduced extremely low tax rates and have become tax havens for companies like Google and Apple. 130 countries, including the US, agreed last week on a plan to tax their companies’ profits at a minimum rate of 15 percent – regardless of where the profits are booked. The pact is a step in the right direction. But for working class Americans who have fallen behind because tax cuts helped the rich get richer, 15 percent is too little, too late. ‘ – Excerpts from a recently published New York Times (NYT) article “This is tax evasion: easy and simple” by Gabriel Zucman and Gus Wezerek
The announcement was first made during the G7 Finance Ministers’ meeting in London, where, according to a Guardian article dated 5th, each of the countries they operated from would pay at least 15 percent tax: “This is a truly historic deal and I am proud that the G7 has shown collective leadership at this crucial time in our global economic recovery. “
More recently, on July 1, 132 countries and legal systems (as of July 9, 2021), including Pakistan, agreed – as done by the OECD (under whose auspices the deal was carried out) – on the “Declaration on a two-pillar solution “The tax challenges posed by the digitization of the economy,” the OECD said that the scope of the agreement aims to ensure that large multinational corporations (MNEs) pay taxes where they operate and make profits, while at the same time taxing them urgently the necessary security and stability of the international tax system. … It would shift some taxation rights on MNEs from their home countries to the markets where they do business and make profits, regardless of whether companies are physically present there. … [and will] Stifle corporate tax competition by introducing a global minimum corporate tax rate that countries can use to protect their tax bases. ‘
The initial threshold above which this minimum tax rate of 15% is to be introduced will also decrease over time, as set out in this five-page agreement within the framework of the “OECD / G20 project on erosion and profit shifting”, whereby “in the scope” is companies are the multinational companies (MNEs) with a worldwide turnover of over 20 billion euros [$24 billion] and profitability above 10% (ie profit before tax / sales), with the sales threshold being lowered to 10 billion euros [$12 billion]… whereby the corresponding review begins 7 years after the entry into force of the agreement and the review is completed in no more than one year. ‘ In addition, a recent article in The Economist, “A Global Corporate Tax Deal Takes Shape” noted, “To counter the common complaint that digital companies can make profit anywhere without registering the physical presence often required to tax them , Governments can add some taxes if local revenues only exceed € 1 million. In small, poor countries with a GDP of less than € 40 billion [$47 billion] the threshold will only be € 250,000 [$296,150]. ‘
One of the next steps in the implementation of this deal is to agree on a detailed implementation strategy by October this year. Among the issues to be discussed during this time and how to proceed afterwards, according to the same Economist article, “After a high-level agreement was reached, negotiators set a deadline of October to settle important details . Some countries are pushing for a minimum tax rate of 15%; others want the ground to be higher. The assessment basis of the profits subject to minimum taxation, the exact amount of the taxation rights to be converted and the exact scope of the measures to be withdrawn unilaterally must also be clarified. According to this, the governments have to work out an international agreement on the redistribution of taxation rights in 2022, which is to be implemented in 2023. The agreement also stipulates that minimum taxes will be required by law in 2022 and implemented in 2023, although countries could do so without entering into a treaty. ‘
While a significant number of countries have acceded, some with the lowest corporate tax rates in the world for multinational corporations, such as Hungary, Estonia, Ireland and Barbados, have not signed the agreement. This is because of the obviously obvious reason why these countries with higher corporate tax rates would become less attractive to multinational corporations as they serve both as a destination for MNCs’ incomes and as a relocation of some of their businesses.
Although the move towards a minimum corporation tax is welcome, there is a general consensus that the tax rate must be raised to at least 25 percent in order to offer meaningful resistance to the MNC’s game of tax avoidance and the “race” to stop down “by some countries at least in terms of reducing tax rates in this regard.
Nobel laureate Joseph Stiglitz emphasized this aspect in his recent article by Project Syndicate (PS) “The global tax devil is in the details”: “… an agreement to introduce a global minimum tax of at least 15% is a big step forward”. But the devil is in the details. The current average official rate is significantly higher. It is therefore possible, even likely, that the global minimum will become the maximum. An initiative that began as an attempt to force multinational corporations to pay their fair share of taxes could generate very limited additional revenues, well below the underpaid $ 240 billion annually. And some estimates suggest that developing and emerging economies would also generate a small portion of this income. ‘
In the statement by Prime Minister Imran Khan recently to the United Nations High Level Political Forum, in which he rightly pointed out that “I accepted the US proposal for a minimum global corporate tax to prevent profit shifting and Welcome tax evasion ”, but he was perhaps not aware that the minimum rate of 15 percent would be too low both to hinder a“ profit shifting ”by MNCs and to generate significantly higher tax revenues, especially from developing countries. Unless they have forgotten to include it in the Policy Briefing to the Prime Minister, the ministries involved in these issues are expected to raise awareness of these issues and prepare better informed Policy Briefs for the Prime Minister. Unfortunately, he missed a chance to campaign for a much-needed higher minimum corporate tax rate, for example of 25 percent, as is the general consensus today. I hope this will be corrected in his future statements.
The other concern that Stiglitz highlighted in the same article, and which makes a lot of sense, is firstly to better define corporate profits, pointing out: “Ensure a broad and comprehensive definition of corporate profits, e.g. deduction for capital expenditures plus interest plus pre-tax losses plus .. “It would probably be best to agree on uniform accounting so that new tax avoidance techniques do not replace the old ones.” He also argued that Pillar One only targeted very large global corporations that needed to be corrected, and recommended that “… the requirement of some developing countries that a greater proportion of corporate profits be redeployed is more than appropriate” he praised the current agreement on “moving away from the test of“ physical presence ”when collecting taxes – something that makes no sense in the digital age.
Given the spending needs in the wake of the outbreak of the pandemic, especially in developing countries, it is to be hoped that countries will lead the way in implementing this agreement in their respective countries and that greater and faster dissemination of the realization of this minimum tax rate will be achieved with it In these difficult times when there is greater economic and social demand due to the pandemic, higher tax revenues can be achieved at the earliest
At the same time, this agreement, if implemented sensibly, will also help contain money laundering in a tax-proof heaven that could otherwise provide much-needed support for financial and balance of payments accounts, especially those of developing countries, and especially those in other countries that the need to buy vaccines, high food and oil prices and the rising debt crisis are knocking heavily on the door of macroeconomic stabilization and adversely affecting income inequality and poverty in many countries, especially in developing countries. In addition, it is hoped that the most strongly represented forum in the form of the UN will take on a stronger and even leading role, which so far primarily the OECD, G7 and G20 have played, in this endeavor to implement a meaningful global minimum tax rate.
(The author has a PhD in Economics from the University of Barcelona; he previously worked for the International Monetary Fund)
He [email protected]
Copyright Business Recorder, 2021