CITY OF NEW YORK: A step forward was taken on July 1 when 131 countries agreed to create a worldwide minimum tax rate of at least 15% for multinational corporations (MNCs) and reallocate taxing powers. However, as it stands, the agreement represents yet another failed opportunity to provide developing countries with a fair conclusion.
It’s encouraging that multilateral initiatives to restructure global taxation are gaining traction again. This is largely due to US President Joe Biden’s desire to put an end to the race to the bottom on corporate tax rates, which has benefited only tax havens. Lower tax rates, in most cases, did not only fail to attract new investment, but also robbed governments of revenue needed for social goals and infrastructure improvements. READ: Commentary: Multinational corporations’ under-taxed profits could help pay post-pandemic public spending However, the new tax agreement reflects global power disparities. The 139 nations who are members of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting were informed of the G7’s agreement last month.
Most developing countries consented despite major reservations when faced with a take-it-or-leave-it situation.
However, a few countries, notably Nigeria, Kenya, and Sri Lanka, did not participate. Even those that did so made it apparent that the talks were far from over. READ: Commentary: Trade dissatisfaction developing, and one step toward rebuilding faith in globalisation TAX RATE PROPOSED IS TOO LOW
There are still a few major concerns to be resolved. The first is that the proposed minimum tax rate of 15% is insufficient to dissuade multinational corporations from profit shifting. This indicates a willingness among some developed countries to safeguard their own global enterprises rather than follow the lead of the US and Argentina, which advocated for a minimum tax rate of 21%, and many African countries, which recommended a 20% rate. A global minimum rate of roughly 15% would do nothing to eliminate profit-shifting incentives in most Latin American and African countries, which had average corporation tax rates of 26% and 27%, respectively, in 2020.
Panama is in favor of a tax reform deal. Luis ACOSTA/AFP
As a result, several countries may decide to implement a higher minimum rate unilaterally.
TAX REVENUES WILL NOT GO TO ‘SOURCE’ COUNTRIESFurthermore, under the OECD proposal, the majority of the new tax revenues will go to MNCs’ home countries, rather than to the so-called “source” nations where these corporations do business and create profits.
A number of emerging economies want the minimum tax to be applied first to MNCs’ interest earnings, royalties, service payments, and capital gains. The existing agreement would limit the minimal tax to interest, royalties, and a list of yet-to-be-defined payments. The amount of revenue generated by the minimum tax is determined by the rate. For poor countries, this is critical. READ: Commentary: The worldwide minimum corporate tax rate is on its way to Singapore, and it will revolutionize how the city-state attracts multinational corporations. According to a recent study by the EU Tax Observatory, a 15% tax rate would net Mexico, South Africa, and Brazil an additional €500 million (US$592 million), €600 million, and €900 million in corporate income tax revenues in 2021, compared to €900 million, €2 billion, and €3.4 billion, respectively, with a 21% levy. Mexico would gain €1.3 billion, South Africa would gain €3 billion, and Brazil would gain €7.4 billion under the Independent Commission for the Reform of International Corporate Taxation’s proposed 25% minimum rate. The OECD accord also establishes a mechanism for taxing multinational corporations’ global profits. However, it would only apply to companies with a global yearly turnover of more than €20 billion and profit margins of at least 10% of revenue. READ MORE: What Does the G7’s Global Tax Reform Plan Mean for Singapore? Furthermore, only 20 to 30% of their “residual” profit above that threshold would be taxed in the nations where it was earned. As a result, this new law may earn less than US$10 billion in additional income per year globally. The fundamental demand of developing countries has been a meaningful reallocation of taxing powers to source countries. The G-24, the primary grouping of developing economies in the discussions, has proposed reallocating 30 to 50 percent of residual profits, while the African Tax Administration Forum (ATAF) has proposed at least 35 percent. A simpler option would be to divide multinational corporations’ global profits across countries using a formula based on important profit-generating characteristics including employment, sales, assets, and resource consumption. However, both the G-24 and the ATAF have previously demanded that a share of all earnings, whether normal or residual, be allocated to source countries. YETA, THIS IS NOT THE END OF THE ROAD. Another issue is that parties to the OECD accord are being pushed to eliminate unilateral measures like digital service taxes. Many developing economies are unhappy about the repeal of these tariffs, as well as the fact that it limits their choices for taxing digital MNCs in the future.
The new tax primarily targets internet behemoths in the United States. JUSTIN TALLIS/AFP
The requirement that developing countries adopt mandatory arbitration of disputes is the final source of worry.
Many people have seen this as a violation of their national sovereignty in the past. They also point to opaque decisions and excessive expenses, as well as the fact that the majority of arbitrators are from developed countries. However, the declaration on July 1 does not mark the end of the trip. Despite the likelihood that the G20 would approve the proposal this week, negotiations will continue, with a final agreement expected in October. READ: Why calling for a worldwide minimum corporate tax is a poor idea To reverse the outcome, developing countries must now demand a greater global minimum tax rate and a larger reallocation of taxing powers, as well as a rejection of forced arbitration. As the United Nations Panel on Worldwide Financial Accountability, Transparency, and Integrity recently noted, the struggle for a fairer international tax system will continue beyond this current process, maybe in a more inclusive venue. The following months will be crucial in ensuring that the final agreement does not merely reflect the interests of affluent economies, but also generates considerable additional revenues for all countries, including those who most need them. Jose Antonio Ocampo, a Columbia University professor and Chair of the Independent Commission for the Reform of International Corporate Taxation, is a former Colombian finance minister and UN under-secretary general. Tommaso Faccio is an accounting lecturer at Nottingham University Business School and the head of the Independent Commission for the Reform of International Corporate Taxation’s secretariat./n
