Parsa Venkateshwar Rao Jr
THE silence from India’s economists on the global minimum corporate tax of 15 percent, which the G-7, the club of the rich industrialized countries, agreed on in the first week of June, followed by the approval of the G-20 countries, including India, and The continued support for the measure from 130 other nations is fascinating but understandable. Even as India watched the 30 years of revolutionary economic reforms of 1991 that ended the supposedly closed socialist era since independence and opened the economy to market forces, the news from global free market leaders must have acted as a damper. One of the main arguments for reform in India was that low taxes are a necessary incentive to attract foreign investment and encourage higher economic productivity.
India’s free market experts have spoken out in favor of a corporate tax cut, but the corporate tax rate has never fallen below 21 percent since 1991, at its peak of around 40 percent. India won’t have much of a problem with the new global minimum corporate tax rate. But it will not be able to take radical – and radical, in connection with taxation always means low tax rates – tax measures to stimulate domestic industry and attract foreign investment. A completely different picture would have emerged if the argument had been for a maximum global corporate tax rate of 15 percent. It’s not just about tax havens with zero tax rates. Ireland has attracted multinational tech giants like Apple and Microsoft with its corporate tax rate of 12.5 percent, which falls below the new minimum of 15 percent. It is also about competitive tax rates as there are competitive tariffs and competitive wage rates.
The question is whether multinational companies like Apple, Amazon, Alphabet (Google) are moving their business to countries with low tax rates in order to avoid tax payments either in the country where they started their business or where they are based in the US . These companies also avoid paying taxes in countries where their goods and services are sold because they operate in a country with a lower tax rate. This was the case with Apple, who do business in European Union (EU) countries and refuse to pay taxes in those countries because they do so from their base in Ireland, their operational headquarters.
The US feels betrayed because all tech giants are American and their corporate headquarters are in America. She feels cheated of her rightful share of the taxes. So it seems that a single tax liability could discourage these multinationals from relocating their operations to other countries. But the tax rate alone may not be a reason for a company to look elsewhere. There are other issues related to the matter. The educational level of the workforce as well as the wage rates. US Treasury Secretary Janet Yellen argues that the global minimum corporate tax would help the middle class and companies would invest in workforce training and research and development.
The multinationals are likely to argue that with lower tax rates, they will spend more on labor costs, which is unlikely, and more on research and development, which is likely. It is the technological lead over the competition that keeps the giants in the running. And many of the technological breakthroughs, particularly in information technology, have happened in America because American tech giants have spent significant sums on research and development. And there is the enviable scientific and technological research in the American higher education system that flows into businesses.
The global minimum corporate tax rate may force tax havens like the Cayman Islands to close their businesses, but it may not create a level playing field on low tax rates. After the decision, Yellen said that this would end the tendency to lower tax rates. There was a time, perhaps a quarter of a century or more ago, when lowering the tax rate seemed the way to go for building a free market economy. What has changed? If market forces were allowed free play, then tax rates and many other things would have their own natural level. Why do the rich G7 countries, led by the US, impose this minimum corporate tax rule? And why did other countries join in so quickly and without reservation? The only reason seems to be that governments do not want to lose their taxes and secure incomes, and corporations are just as greedy for their profits. In the battle between taxes and profits, governments are looking for ways to increase their tax revenues and companies to increase their profit margins. There is this fundamental difference between governments and corporations. Governments have to tax all companies. A company’s tax prospects are limited to its own company.
The question arises: what is the minimum tax that fairness governments can levy? Is the proposed 15 percent global minimum tax rate fair? Many companies may say that it is not a fair deal because it is easier for larger companies with bigger profits to get rid of the 15 percent tax and it is a burden for individual companies with smaller sales. Similarly, the 15 percent minimum corporate tax rate may seem attractive to smaller economies, but it will be a heavy burden for the smaller companies operating in the smaller economies.
The important question is how this consensus on the global minimum corporate tax rate came about. How much have the rich G-7 countries pissed off the emerging G-20 countries and the rest of the low-income countries? Why does the G-7 dictate tax rates to the rest of the world?