The Proposed Global Minimum Tax Rate – A Game Changer? – Tax

Introduction

For so long, multinational corporations (MNCs) have been
criticized globally for employing several tax avoidance tactics
that exploit the gaps and mismatches in tax rules. The Organization
for Economic Cooperation and Development (OECD) has been coordinating tax negotiations among 140
countries over the years in order to reform global tax rules on
cross-border digital services and curb tax base erosion by imposing
a global minimum tax rate on big corporations. In September 2013,
OECD and G20 countries endorsed a 15-point Action Plan for the purpose of
addressing base erosion and profit shifting (BEPS). The Action Plan
is made up of 15 specific measures together with 3 pillars, which
are: “introducing coherence in the domestic rules that affect
cross-border activities, reinforcing substance requirements in the
existing international standards, and improving transparency as
well as certainty.” These measures are, therefore, geared
towards addressing tax avoidance and profit shifting by
multinationals, as well as improving the coherence and certainty of
global tax rules while ensuring a more transparent tax system. OECD
and G20 countries recognized that the coordinated implementation of
the solutions proposed in the BEPS package, as well as the
widespread participation of developed and developing countries,
would be critical in reducing base erosion and profit shifting.
Thus, in 2016, the OECD established the OECD/G20 Inclusive
Framework on BEPS which brings together over
135 countries on an equal footing, including 66 developing
countries, as well as international and regional tax organizations.
On 12 October 2020, the OECD/G20 Inclusive Framework on BEPS
released blueprints on Pillar One and Pillar Two, which comprised
proposed solutions to address tax challenges arising from the
growing digitalization and globalization of the world economy. The
“twin pillar” approach is geared towards addressing nexus
and profit allocation challenges (Pillar One), as well as provide
for global minimum tax rules (Pillar Two). In April 2021, the
proposals were updated and simplified by the United States
President Biden’s Administration and formed the basis for
political discussions on global tax challenges by the Group of
Seven (G7).

In an attempt to prevent MNCs from shifting profits to low tax
countries and tax havens to avoid paying corporate income taxes,
finance ministers from the G7 countries recently reached a historic agreement, which allows countries to
tax 20% of the profits of large and profitable multinationals with
at least a 10% profit margin, as well as implement a global minimum
tax rate of 15%. MNCs would be required to pay this amount
regardless of where they are headquartered or the jurisdictions
they operate. Although analysts predict that this agreement would add a level
of certainty to the global tax system and serve as a revenue
raising tool, several implications may arise from its
implementation. In particular, low tax countries and tax havens,
such as Ireland, which depend on tax revenue for development may
lose a significant amount as a result of the global minimum tax.
Also, since under the G7 agreement, the United States is expected
to give up some taxing rights on overseas profits of internet
giants domiciled in the country, there is doubt as to whether the
agreement, which requires two-third majority votes to pass, would
be passed by the US Senate that is evenly split between Republicans
and Democrats.  Republican lawmakers have strongly shown their
opposition to the minimum corporate tax rate and have argued that it has the potential of cutting
the United States’ economic competitiveness overseas and
reducing the level of tax decision making to foreign countries. In
addition, there is the argument that the proposed minimum tax rate of
15% is too low, as it is close to the rates imposed in low tax
countries like Ireland and therefore reflects the desire of the G7
countries to protect their own multinationals as opposed to
following the lead of the United States Biden’s Administration,
which initially proposed a global minimum tax rate of 21%.There is
no doubt that the proposal will have some positive and negative
implications on developing countries across the world when viewed
from different perspectives. This article, therefore, examines the
potential positive and negative impacts of the proposed minimum tax
rate to the global economies.

Positive Implications

The global minimum tax no doubt provides several benefits and
opportunities that may avail different nations across the world. It
has been noted that a global minimum tax would end the
decades-long race to the bottom in corporate taxation, while
ensuring fairness for the middle class and working people around
the world. In the wake of the COVID-19 pandemic, countries across
the globe have suffered massive falls in tax receipts, and have had
to borrow huge sums to prop up their economies. According to Vitor
Gaspar, Director of the International Monetary Fund (IMF)’s
fiscal affairs department, over the past year, countries across the
world have spent an estimated amount of $16 trillion battling the
coronavirus. He further noted that the bills spent on health
care and economic support drove the average country’s public
debt from 83.7 percent in 2019 to 99% of gross domestic product in
2020. The dire economic situation resulting from the adverse
impacts of the pandemic has led to the need for countries to
increase revenue mobilization in order to provide public services
and drive economic development and growth. A global minimum tax
rate would, therefore, assist the crippling global economy to
thrive, by levelling the playing field for companies and
encouraging countries across the world to compete on a positive
bases.

The need to reduce the shifting of profits by MNCs to tax havens
has become of paramount importance. Recent studies have shown that about 40% of
profits made by MNCs (which is about $650 billion) are being
shifted to tax havens and that 10% of the world’s largest MNCs
are responsible for this activity. This results in a $200 billion
loss in global tax revenue. Taxing the billions of dollars shifted
to low tax jurisdictions and tax havens by MNCs at a 15% rate will
no doubt yield a significant amount of revenue which will be spread
out among different countries. Published estimates have shown that effecting
a change to the way corporate taxes are collected could generate
between $100 billion and $600 billion per year for countries. Also,
by setting a global minimum tax rate, countries will have the
opportunity to prevent further erosion of their tax base without
causing severe damage to corporate activity. It has also been observed that a 15% global minimum tax would
increase the legitimacy of corporate taxation. In addition, tax experts are of the view that the global
minimum tax rate would benefit large and developing countries, such
as India, which find it difficult to reduce corporate tax rates in
order to increase foreign direct investments. Since the global
minimum tax applies to MNCs that shift profits to no or low tax
countries, experts suggest that India will not be affected in a
major way. In fact, India, which is a big market for large numbers
of tech companies, is expected to benefit from the 15% corporate tax
rate since its domestic tax rate is higher than the threshold and
would therefore not affect companies doing business in the
country.

Although tax incentives to attract MNCs are likely to continue
even after the introduction of a global minimum tax, as noted by the International Monetary Fund, the
value of these incentives will decline since MNCs will only be able
to reduce their liabilities to 15% and not zero. It is, therefore,
safe to submit that imposing a 15% global minimum tax rate on MNCs
is better than nothing.

Negative Implications

Despite the numerous benefits of the G7 agreement, the minimum
tax rate of 15% could cause severe implications to low tax
countries, like Ireland and Hungary, which depend largely on tax
revenues for economic growth and development. Since the 1990s,
Ireland has had a low corporate tax rate of 12.5% that has
continued to attract the country to the world’s largest MNCs,
including tech giants and pharmaceutical companies. The low tax
rate in Ireland has led to an influx of billions of dollars in
investments from MNCs and a rise in the country’s GDP growth despite the global
economic downturn during the COVID-19 pandemic. The global minimum
tax rate of 15% has the potential of causing major repercussions on
the economy of Ireland, as it could make the country less
attractive to MNCs and therefore lead to a fall in the
country’s tax revenue. Research shows that under the G7 minimum tax
agreement, Ireland is likely to lose over ?2 billion which is a
fifth of its annual corporate tax revenue. Consequently, the scale
of economic damage would be substantial if MNCs decide to leave
Ireland. According to an estimate projected by the country’s Fiscal
Advisory Council, the departure of half of the 10 largest
multinationals could cost the government ?3 billion in tax
revenues, and the loss of more than 10,000 jobs.

Also, tax justice campaigners have argued that the
15% minimum corporate rate is too low and therefore inadequate to
stop the “race to the bottom”. They argue that a 15% rate
will generate 60% additional revenue flow to the G7 countries,
thereby leaving very little for developing countries which are in
dire need of revenue particularly in an era of a pandemic. Since
under the G7 proposal, the bulk of the additional tax revenues may
go to the home countries of MNCs and not to the source countries
where they generate revenue, there is a very high chance that the
wealthy countries will receive the majority of the taxable profits derived from the tax havens,
while the poor countries will be left with the scraps. As aptly noted by Oxfam’s executive director,
Gabriela Bucher, “it’s absurd for the G7 to claim it is
‘overhauling’ a broken global tax system by setting up a
global minimum corporate tax rate that is similar to the soft rates
charged by tax havens like Ireland, Switzerland and Singapore. They
are setting the bar so low that companies can just step over
it.” Consequently, giving priority to the home countries of MNCs has the potential of
reinforcing rather than reducing the unfairness that exists in the
current global tax system.

There is no doubt that developing countries rely heavily on
corporate tax revenue and have been more affected by the profit
shifting of MNCs into low tax countries and tax havens. Research shows that developing countries lose
hundreds of billions of dollars annually as a result of tax
avoidance by multinationals. Since most African countries have
corporate tax rates of 25 to 35%, it has been argued that global rate of 15% is simply too
low and cannot lead to a significant reduction in profit shifting
from the region. Tax justice campaigners are therefore of the view
that the global minimum tax rate should be at least 21% as
initially proposed by the United States or even a 25% rate as proposed by the Independent Commission for the
Reform of International Corporate Taxation (ICRICTIt was found
that, for selected developing countries like Brazil, India and
South Africa, only an average of $1 billion would be benefited from
the 15% tax rate. On the contrary, if the minimum corporate tax is
raised to a 25% rate, it is projected that more than $1 billion can
be generated in these selected developing countries. Brazil could
generate $9 billion, India could generate $1.83 billion while South
Africa could generate $3.65 billion.

The threat of a trade war may also affect the implementation of
the G7 agreement especially if countries without digital tax
agreements insist on keeping their digital services taxes in place.
Several countries, including France, the UK, India, and Nigeria,
have introduced unilateral measures that align with their policy
considerations for the purpose of taxing digital multinationals
with significance economic presence (SEP). Over the years, the
United States has threatened to impose retaliatory measures on
countries with digital services taxes against US-based
multinationals, as it believes that the digital taxes discriminate
against these multinationals and are inconsistent with
international tax rules. The United States Biden’s
administration has recently vowed to impose tariffs on goods
imported from Britain, India, Spain, Austria, Italy and Turkey in
retaliation for their digital taxes. The retaliatory measures are,
however, kept on hold until the global tax negotiations unfold.
Consequently, countries that tax US-based multinationals and which
do not have a digital tax agreement with the United States would
have to revise their SEP rule in order to avoid getting involved in
a trade war with the United States.

Conclusion

There is no doubt that the G7 proposal on global minimum tax is
a laudable attempt to address tax avoidance and profit shifting by
MNCs. However, there are major obstacles that may impede the
implementation of the agreement. First, the G20 nations that
include different group of economies (including China, Russia,
India and Brazil) would have to give support to the proposed
minimum tax rate in their next meeting scheduled to hold in July.
There is no certainty as to whether the proposal would receive the
blessing of the 19 member countries and the EU, particularly in
light of the fact that some of the G20 nations maintain a low
corporate tax rate in a bid to attract investments by
multinationals. Ireland, which, keeps a low corporate tax rate of
12.5%, has protested against the global minimum tax and is
therefore unlikely to accept a higher minimum tax rate which may
reduce the influx of revenue in investments from multinationals.
There is also the issue of whether the proposal would be passed by
the United States Congress, especially considering the fact that
the Republicans have shown resistance to the minimum corporate tax
rate, as they are of the view that imposing the tax rate would make
the United States less competitive in the global economy. It is,
therefore, unlikely that the proposal would be passed in an
evenly-divided Congress, where two-thirds majority is required.

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