Global tax reform: curbing tax avoidance by multinationals

Great Debates
1

The progress currently being made in curbing tax avoidance by large corporations is highly significant for the world, so I’m surprised there hasn’t already been a discussion about this.

The current initiative will begin to limit the wealth and power of multinationals, and will provide hundreds of billions a year in tax revenue for governments around the world.

President Biden has been quietly but strongly pushing for global tax reform, and there is wide support for it by the EU and elsewhere.

The G7 meeting today is likely to agree to a minimum corporate tax rate of at least 15%, and a system to prevent tax avoidance by multinationals. This will pave the way for a wider agreement at the G20 meeting next month.

Finance ministers from Group of Seven nations meeting in London on Friday are expected to back President Biden’s call for a global minimum tax on corporate profits, giving him an early win in a grueling diplomatic campaign that is just beginning.

The new minimum tax, one half of a two-pronged global reform effort, is designed to halt a cycle of corporate tax-cutting that has sapped government revenue around the globe. As part of a package deal, negotiators are also wrestling with European demands to tax American technology giants such as Google and Facebook, which earn substantial revenue in countries where they have little physical presence.

The EU’s four biggest economies have raised the pressure for a landmark agreement to curb tax abuse by multinational companies to be reached at G7 meetings in London on Friday.

 
Explainer:

Negotiations to reform the global tax system have been under way since the aftermath of the 2008 financial crisis, with the latest talks taking place between 135 countries at the Organisation for Economic Cooperation and Development (OECD) in Paris. There are hopes that support from the G7 will spur wider backing at a meeting of G20 finance ministers in Italy next month. The aim is to strike an agreement by October.

There are two main pillars of the blueprint being negotiated.

  • Under pillar one, countries would get a new right of taxation over a share of profits generated in their jurisdiction by an overseas-headquartered multinational. This would mean taxing the source of a company’s revenue, such as sales of shoes or digital services, regardless of the firm’s physical location.

  • Under pillar two, a minimum corporation tax rate would be imposed by countries on the overseas profits of large companies headquartered in their jurisdiction.

2

. This would mean taxing the source of a company’s revenue, such as sales of shoes or digital services, regardless of the firm’s physical location.<<

Long overdue: and I hope that also stops intra-group payments from counting as they’re payments to suppliers. If the money ends up with the same ultimate owners, it ought to be treated as part of the initial revenue.

And Luxembourg can lump it.

3

Let’s just hope this doesn’t become a race to the bottom for all the countries that now have a higher corporate tax rate than the new international minimum.

4

I am very much in favor of this, but I think at best this is the first step in what is going to be a long and difficult journey. So far they only have the G7 on board, but they really need to get the countries that are currently acting as tax havens (looking at you Ireland) to get on board either with carrots or more likely with sticks. Also its one thing to get an agreement at a meeting its another to take it home and get it passed.

For all their anti-globalist rhetoric I somehow I don’t think that the Republicans are going to go for this, since it basically eviscerates their argument that we need to lower taxes in order to compete globally.

5

I’ve seen it remarked that the proposal would apply to profits above 10%. Which wouldn’t cover companies operating on high volumes but low margins.

Like - erm - Amazon.

https://www.theguardian.com/technology/2021/jun/06/global-g7-deal-may-let-amazon-off-hook-on-tax-say-experts

6

I"m not a maths or econ guy, and I’m not sure I understand how this proposal would work. Could you explain it in simple language, avoiding terms like ceteris paribus and the like?

7

Well, sine ceteris paribus… Fiscalia virumque cano. :slightly_smiling_face:

In a nutshell, large multinationals set up their headquarters in a low tax country, then use various schemes to transfer most of their profits there. They end up paying little or no tax in the countries where their profits are generated.

This agreement aims to stop this practice, and tax multinationals more fairly. Profits will taxed in the countries where the profit is generated, and a minimum tax rate of 15% will apply.

Apple had its HQ in Ireland.

When the EU investigated Apple in Ireland in 2016 they found private tax rulings from the Irish Revenue giving Apple a tax rate of 0.005% on over EUR€110 billion of cumulative Irish profits from 2004 to 2014. wiki

When the EU cracked down on them, they moved to Jersey.

In 2017, Apple earned $44.7 billion outside the US and paid just $1.65 billion in taxes, the BBC reported.

There is a long list of multinationals that pay very low tax.

8

Thank you. It’s starting to become clearer. But can a number of different countries actually agree to move pari passu?

9

Deo volente.

The G7, representing the largest Western economies, have already agreed to it. The next step is to get the G20 countries to agree to it at the upcoming meeting next month.

If the G20 (Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom, the United States, and the European Union) agree to it, then it becomes possible.

It’s in the interest of all countries except the tax havens to agree to it, as it will increase government revenue for all of them. Once the major economies agree, the tax havens will no longer work, as companies will no longer be able to escape taxes by moving their profits elsewhere. The minimum tax rate will prevent countries undercutting each other.

The devil is in the details.

10

Sidebar: does the G20 have a relegation round, like European soccer? “Sorry, Mexico, your GDP has slipped too much. Let’s welcome in : New Zealand!”

11

Maybe they can have a relegation playoff involving mud wrestling matches between finance ministers.

12

They’re slippery and slimy enough already, they don’t need mud.

13

Presumably, but nothing is automatic - political weight and potential embarrassment must come into it. That’s why we’re back to a G7 from the G8 (i.e., Russia wasn’t invited: but after all, Putin’s regime has a rather different concept of taxation - and democracy).

14

The next step has been taken.

Now 130 countries are on board, including some tax havens that ‘see the writing on the wall’ for corporate tax avoidance.

Efforts to force multinational companies to pay a fairer share of tax have taken a decisive step forward after 130 countries and jurisdictions agreed to plans for a global minimum corporate tax rate.

In a landmark moment for the world economy, the Organisation for Economic Co-operation and Development (OECD) issued a statement committing each of the countries to a two-pillar plan to radically reshape the global tax system.

The principle of the agreement is that multinationals would be forced to pay a minimum of 15% tax in each country they operate in. It also includes plans to prevent the shifting of profits into tax havens by tech giants and other multinationals by enabling signatory countries to tax the world’s largest companies based on revenues generated within their borders.

The 130 nations that have signed so far account for 90% of the world economy. Biden said the breakthrough put the world in “striking distance of full global agreement to halt the race to the bottom for corporate taxes”.

15

Sadly, it seems that Ireland is opting out.

A Thursday statement by 130 OECD countries approved a tax rate of at least 15% and taxing more of the profits of the biggest multinationals in countries where the profits are earned. Only nine nations, including Ireland, opted out.

Switzerland backs landmark OECD corporate tax agreement - SWI swissinfo.ch

16

Why does this need international cooperation? Couldn’t any single country pass laws to tax companies doing business in their country? It’s not like Amazon is going to say “Well, if you’re going to tax me, I’m going to stop all of my US business”.

17

It’s not that simple. There are international agreements and conventions in place, mostly from the first half of the 20th century.

The problem in earlier times was double taxation.

Suppose a company is based in country A, but generates profits in country B, which it wants to send back to its home country.

If B taxes the profits generated in B, and A then taxes the profits from B which are transferred back to A, then it’s unfair to the company, which is taxed twice on the same profits.

Hence both countries have to agree how to handle the situation. If the profits are taxed only in the ‘home country’ (as they are now), then that encourages tax havens. But if country B taxes the profits generated there, then country A has to agree to stop taxing profits from B that are transferred back to A.

Except it’s a lot more complicated than that.

See this paper:

From double tax avoidance to tax competition: explaining the institutional trajectory of international tax governance

ABSTRACT

This article presents a history of international tax governance and offers a rationalist reconstruction of its institutional trajectory. As an unintended consequence of its institutional setup, the tax regime, which originally only dealt with double tax avoidance, endogenously produces harmful tax competition.

Despite this negative effect there are only incremental and partial changes of the regime, which are insufficient to curb tax competition. I argue that this development can be explained by considering the properties—and the sequence in which they come up—of the collective action problems inherent in double tax avoidance and tax competition.

First, in double tax avoidance, a coordination game with a distributive conflict, governments did not want to endanger the solution they had institutionalized long before tax competition became virulent.

Second, governments are unable to resolve the emergent asymmetric prisoner’s dilemma of tax competition due to conflicts of interest among big and small country governments and successful lobbying of corporate capital.

As a result, the institutional trajectory is characterized by the simultaneous occurrence of stability in the core principles and indirect and incremental changes of the rules in the form of rule stretching and layering.

And this one:

International Business Taxation

18

There is a pretty good explanation in today’s Votemaster:

One way this operates is to transfer all their Intellectual Property to a subsidiary in a country like Barbados, which then charges the parent company, say in the US, extremely high fees to use that IP, so high that the US company makes very little profit, or even loses money.

The remedy discussed is to total the company’s global income and tax the percentage of that global income represented by the share of that business done in the US. I assume it is hard to lie about the global income without deceiving the shareholders.

19

It doesn’t matter what Ireland opts into or out of. The EU will determine whether sufficient tax is collected.

20

That depends on whether the relevant EU rules would require unanimity to be approved or whether Ireland is such an outlier it can be outvoted. Plus IIRC any member state can invoke the nuclear option of declaring something a vital national interest.

At which point horsetrading begins, and it becomes a question of what they will expect from the others as the price of flexibility. Like a tougher line on the Northern Ireland Protocol, aka British sausages.