G7 tax repression marks the end of hyper-globalization
On June 5, the world’s major economies announced a deal that will strengthen their ability to raise taxes for global businesses. The deal still needs the formal approval of a wider set of countries, and many details remain to be worked out for it to be effective. Nonetheless, it would not be a stretch to characterize the Group of Seven (G7) agreement as historic.
The G7 agreement has two parts. First, it proposes an overall minimum tax of 15% on the world’s largest companies. Second, a portion of the global profits of these companies will be recovered in the countries where they do business, regardless of the location of their physical headquarters.
These goals are as clear an indication that any other rule of hyper-globalization – under which countries must compete to offer global companies ever softer deals – are being rewritten. Until recently, it was US opposition that held back global tax harmonization. Now, on the other hand, it was the administration of US President Joe Biden that pushed the deal.
Since the race to the bottom in business taxation began in the 1980s, the average statutory rate has dropped from almost 50% to around 24% in 2020. Many countries have loopholes and generous exemptions that reduce the rate. effective single-digit tax. More damagingly, global companies have been able to shift their profits to pure tax havens such as the British Virgin Islands, Cayman Islands or Bermuda, without having to move any of their actual operations there. Estimates by Gabriel Zucman of the University of California at Berkeley reveal that a disproportionate share of foreign profits of US companies is recorded in such tax havens, where they typically employ only a few people.
Leaving aside questions of administrative feasibility, the new agreement could face two opposing objections. Defenders of tax justice will criticize the global minimum of 15% as being too low, while many developing countries will describe the global minimum as an unwarranted restriction that will hamper their ability to attract investment. The G7 deal appears to reflect both sets of concerns: the low threshold could allay the concerns of developing countries, while global profit distribution will allow high-tax jurisdictions to recoup some of their lost revenue.
Among the developed countries, only Ireland, with a legal rate of 12.5%, is below the proposed minimum. But there are small countries like Moldova (12%), Paraguay (10%) and Uzbekistan (7.5%) that have set their rates particularly low to attract foreign investors, which they see as a source of quality jobs and advanced technologies. In inhospitable investment environments, lowering taxes is one of the few immediate ways in which governments can compensate businesses for the many disadvantages they face. And effective tax rates in some Asian countries, like Singapore (where the statutory rate is 17% but lower rates apply to some companies), can also end up on the wrong side of the minimum.
The argument for imposing a common floor for corporate taxation is strongest when countries have similar preferences and want to avoid a “prisoner’s dilemma” in which their only reason for lowering taxes is to prevent capital from going elsewhere. This can apply to most of the developed countries in the world, but certainly not to all, as the examples of Ireland, the Netherlands and Singapore indicate. But when countries differ widely in terms of levels of development and other characteristics, what is appropriate in one may be a barrier to growth in the other.
The United States and high-tax European countries could complain about losing tax revenue when poorer countries keep rates lower. But nothing prevents these countries from unilaterally taxing their home businesses at higher rates: they can simply apply the tax to the overall profits of domestic businesses, distributed according to their share of income from the domestic market. As Zucman argued, each country can do it alone, without harmonization or even global coordination.
This is precisely what the second part of the G7 agreement envisages (although it is only part of the way). Under the agreement, the largest multinational companies with profit margins of at least 10% are expected to allocate 20% of their global profits to the countries where they sell their products and services.
The reason the United States prefers an overall minimum, in addition to the national allocation, is that it does not want to put its businesses at a disadvantage compared to businesses in other countries by taxing them at significantly higher rates. But this competitive motive is no different from the desire of poor countries to attract investment. If the United States wins and the United States loses, it will be because of relative power, not economic logic.
The Biden administration initially wanted the overall minimum tax to be set at 21%. The possible compromise of 15% could be low enough to minimize tensions with the poorest countries and allow the latter to engage. The balance between global rules and national sovereignty may have been appropriately struck in this case.
But for countries like the United States, this comes at the cost of lower tax revenues, unless the second part of the distribution is strengthened. Ultimately, a global tax system that improves the ability of individual countries to design and administer their own tax systems, in light of their own needs and preferences, is likely to prove to be more robust and sustainable than attempts at harmonization. international tax.
What is now clear is that countries that operate as pure tax havens – simply interested in transferring paper profits without bringing in new capital – have little to complain about. They have rendered a great service to global corporations by facilitating tax evasion at considerable cost to the treasuries of other countries. Global rules are fully justified to prevent such blatant beggar-thy-neighbor action. The G7 agreement is an important step in the right direction. © 2021 / Project union
Dani Rodrik is professor of international political economy at the John F. Kennedy School of Government at Harvard University and author of “Straight Talk on Trade: Ideas for a Sane World Economy”.
Never miss a story! Stay connected and informed with Mint. Download our app now !!