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World leaders should resist pressure from the US to introduce a global minimum corporate tax, despite the recent adoption of the plan by the G7.
It would damage Businesses, small businesses, workers and consumers, all while preventing investment and wealth creation. If anything, the world needs more competition for post-pandemic recovery.
Treasury Secretary Janet Yellen’s geopolitics Move is an ace up his sleeve to ensure American corporations cannot escape the impending tax hike by President Joe Biden’s administration.
Biden acknowledges that raising national corporation tax would hurt the US economy. However, the real reason the Biden government is promoting concerted global action is to prevent jurisdictional arbitrage and allow him to carry out his unprecedented government Spending plan.
Unfortunately, the tide is on his side. On the one hand there were the developed countries to attempt Taxing digital services from companies such as Facebook and Netflix across borders for years. On the other hand, many have governments need to cover large deficits from the deliberate issue of unfinanced pandemic incentives.
As expected, France, Germany, Canada and other rich countries have welcomed the application. Canada’s Treasury Department spokeswoman Katherine Cuplinskas said, “It’s only fair, and Canadians expect companies to pay their fair share of revenue posted in Canada and around the world.”
Smaller countries that have profited from tax competition are protesting. Ireland, for example, has expressed reservations and Luxembourg Finance Minister Pierre Gramegna has defended the right of small economies to attract businesses.
A global property tax is supposed to discourage Shifting profits from one jurisdiction to another. By setting a floor on corporate tax revenues, countries would no longer compete with incentives to relocate.
According to this approach, companies that transfer profits abroad would receive a “charge”Tax equal to the difference between the global minimum and a country’s corporate tax rate. Likewise, countries that reject the baseline would in fact be confronted with sanctions such as the refusal to allow companies to deduct taxes on income generated there.
The Organization for Economic Development and Cooperation (OECD) estimates that a base rate of 12.5 percent would be enough to generate significant gains for countries of all income levels. Although reporting and enforcement remain a difficult challenge, the OECD has argued that a global corporate tax would create transparency about business practices.
Practitioners disagree. For Christian Frey, Deputy Head of Finance and Taxes at the Swiss business lobby “conomiesuisse, a corporate minimum” won’t close Tax loopholes between countries. Instead, companies will redouble their efforts and eventually find a way to prevent profits from getting into the treasury.
“The competition for activities with high added value will continue anyway – maybe just not through the instrument of taxation, but in other ways. You won’t be able to prevent it, ”said Frey.
The case for a global tax base is that companies, especially in the digital economy, are shifting Profits in tax havens. In response, countries are constantly competing for business investment with attractive tax systems and other business-friendly policies.
As a result, the global average corporate tax rate has steadily declined over the past 40 years. From an average statutory corporate tax rate of 40 percent in 1980, it fell to 24 percent by 2020.
During the same period, the evolving forces of globalization and digitization were I drove a structural change in the global economy and enabled new manufacturing technologies, namely 3D printing and factory automation. In addition, a large and growing portion of international trade consists of services, royalties, and royalties.
According to McKinsey Global Institute, data flows across borders passed from almost nothing in 2005 to over 1,400 terabytes per second in 2017. The S&P 500 Foreign Revenue Exposure Index has more than doubled in the past decade, showing that companies are more multinational than ever.
There is nothing wrong with that. Human interactions are dynamic, as is the way companies around the world interact with one another. In fact, such dynamics are a driving force to prosperity.
Economies are maturing and producers are constantly finding more convenient trade alternatives. The same applies to innovation, which is increasingly cross-border.
A global minimum corporate income tax is a 20th century solution imposed on the economy of the 21st century, where the digital world breaks boundaries and the essence of taxation. These trends have allowed companies to maximize their profits and save more, which has led to higher investments.
Less competition between countries means less trade, economic growth, job opportunities and wealth accumulation – the opposite of what the world needs in a historic collapse in GDP.
If world leaders want robust economic recovery in countries of all income levels, negotiating a slowdown in world trade with harmful tax hikes is not the way to go – unless, of course, their priorities are elsewhere.
Paz Gómez is a research fellow at the Frontier Center for Public Policy.
Paz is one of our thought leaders. For interview requests, click here.
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