Tax revolution or just … meh?
By Christian Hallum and Susana Ruiz Rodriguez
Last week the G20 countries endorsed the OECD’s effort to update the century-old flawed rules for taxing multinational companies. French Finance Minister Le Maire called the moment a ‘tax revolution’ and according to the G20 countries the new deal will create a ‘fairer international tax architecture’.
The reception the deal got from tax justice campaigners and many developing countries was however not quite as enthusiastic. For us at Oxfam, the deal was less of a history-making moment and more a case of history repeating itself as we once again saw a group of rich countries come together to shamelessly game the rules in their favour. Let’s unpack what happened.
Only the little countries…
At the G20 meeting that endorsed the deal, there was a moment which was perhaps more revealing than the carefully crafted official communique. The moment came when US Secretary of the Treasury Janet Yellen according to several outlets said that a handful of ‘smaller countries’ still opposed the deal.
Here’s the thing: While the countries Yellen may have had in mind were tax havens like Ireland, countries that oppose the deal also include Nigeria - Africa’s biggest economy and most populous country – and Kenya. These countries were supported by a number of other developing countries who expressed reservations and criticized the deal for being unfair and unambitious.
While Yellen and the Biden administration deserve credit for trying to push for a more ambitious tax deal than the one we got, the statement can be seen as symptomatic of negotiations where the views of countries of the global south – home to the majority of the world’s population - were routinely dismissed as less important. So, let’s look at the two pillars of the tax deal and the problems with them.
Pillar 1: Too narrow and strings attached
The first part of the two-pronged tax reform would make some corporations pay more tax where they have their sales. These new rules have especially been developed with the business models associated with the digital economy in mind. This part of the tax deal does not make corporations pay more tax but tries to redistribute where tax is paid.
The OECD’s proposed solution is good in principle because it recognizes the need to use sales or other factors to reallocate taxing rights. But in practices it falls flat.
First, because it only applies to companies with a turnover above €20 bn. and profits above 10% and also exempts the financial industry the new rules would apply to a ridiculously low number of companies, estimated by experts to be as low as 78 corporations.
Second, because the deal only seeks to redistribute a sliver of profits above 10% the actual amounts that it would redistribute are minor. To use an example: A company with a 15% profit rate representing €150bn. would under the OECD deal have to pay 1-1.5% more tax on profits in markets where they have their sales.
But pillar 1 is not only about introducing new ways to tax multinational corporations, it is also about removing taxes. The US has been very insistent that the new redistribution of taxing rights to market destinations will only happen if countries promise to remove existing taxes on tech companies. Lots of countries – including Kenya and Nigeria that didn’t agree to the deal – have adopted such digital taxes. Removing them will represent a tax cut to tech companies and will remove much needed tax revenue. And while pillar 1 applies to more sectors than the current digital taxes do, its narrow scope means that the trade-off in terms of revenue is far from clear. For example, estimates from the UK show that Google would only have to pay less than one third under the OECD’s pillar 1 proposal compared to what they would pay under the UK’s current digital tax. Countries also sign up for arbitration, meaning that they will have to abide by the decision of panels of experts in cases of disputes between their tax authorities and multinational corporations, which has raised concerns especially among developing countries.
Taking all these together, pillar 1 does not look all too appealing to many countries. While it is not meaningless, it is perhaps equally clear that terming it a ‘tax revolution’ is taking it too far.
Pillar 2: A minimum tax that is too low and full of holes
The second part of the deal is a global minimum tax, fixed at 15%. While nominal tax rates worldwide on corporate profits were on average 40% in the mid-1980s, they spiraled down to 23% in 2018 and could hit zero by 2052 at the current pace. Pillar 2 could have stopped this race to the bottom but has three crucial shortcomings.
First, the 15% rate is simply too low. In the wake of World War 2, leaders such as Franklin D. Roosevelt ensured corporates paid between 40% and 50% tax rates, which stayed for decades. The new low floor of 15% looks decidedly unambitious in comparison and risks normalising rates of taxation previously associated with tax havens such as Ireland and Singapore. And the rate matters. Even with the highly unequal distribution of the benefits under the OECD proposal, a 25% global minimum rate would have raised nearly $17 billion more per year for the 38 poorest countries for which we have data than a 15% rate ― enough to vaccinate 80 percent of their population.
🇦🇷Great to see @Martin_M_Guzman embracing @icrict call for global formulary apportionment and 25% global minimum tax to reform the way multinationals are taxed. Listen to Argentina's position in the @OECDtax @g20org negotiations 🇦🇷 pic.twitter.com/LvuatQW4R9
— Icrict (@icrict) June 29, 2021
Second, an overlooked aspect of the 15% minimum tax is that it is full of loopholes. Companies can achieve much lower tax rates in countries where they employ workers and have a physical presence, as the deal would grant them a form of deduction for these expenses. To illustrate, a company with a factory worth €100 million, salary expenses of €5 million and untaxed profits of €10 million would under the OECD agreement only have to pay an effective tax rate of 3.2% instead of the full 15% because of these deductions. A new study documents that this exemption alone could reduce revenue from the 15% minimum tax by 23% in the EU.
Lastly and perhaps worst of all, it gives almost all of the revenue raised by the minimum tax to a handful of rich countries. While the seven richest countries under the G7 would take about 60% of the new revenue, the poorest 38 countries would only reap less than 3%. This is despite the 38 countries being home to more than a third of the world’s population. In an international tax system that is already skewed towards the interests of rich countries, which is partly a legacy of the colonial era when the current century-old tax rules were developed, this expansion of the system’s inequality is grotesque.
Tax revolution or…. meh?
There can be no doubt that it is significant that a number of countries have come together to update rules that have stood for more than a century. And the new global minimum tax is bad news for some tax havens. But looking at all the shortcomings it is not difficult to see why Nigeria, Kenya, Argentina and other countries have been skeptical. The deal as it is risks exacerbating the already unacceptable inequalities that are built into our international tax system, and rather than stopping the race to the bottom it could normalize tax rates previously associated with tax havens. At a moment of unprecedented crisis and inequality, this is not good enough. We need to fight for a better deal.
Susana Ruiz Rodriguez and Christian Hallum are the Tax Justice Policy Leads at Oxfam