World leaders should resist U.S. pressure to enact a global minimum corporate tax, despite a recent move by the G7 countries to adopt the plan.
It would harm corporations, small companies, workers and consumers while discouraging investment and wealth creation. If anything, the world needs more competition for post-pandemic recovery.
U.S. Treasury Secretary Janet Yellen’s geopolitical move is an ace up her sleeve to ensure American companies can’t escape the looming tax hike from President Joe Biden’s administration.
Biden acknowledges that raising the national corporate tax would be detrimental to the U.S. economy. However, the real reason the Biden administration is promoting a concerted global action is to prevent jurisdictional arbitrage and allow him to carry out his unprecedented government spending plan.
The tide is on his side, unfortunately. On one hand, developed countries have been trying for years to tax digital services across borders from companies such as Facebook and Netflix. On the other hand, many governments need to cover large deficits from the deliberate issuance of unfunded pandemic stimulus.
As expected, France, Germany, Canada and other rich countries have welcomed the proposal. Katherine Cuplinskas, a spokesperson for Canada’s Finance Department, has said: “It is only fair, and Canadians expect that businesses pay their fair share of tax on revenue booked in Canada and around the world.”
Smaller countries that have benefited from tax competition are protesting. For instance, Ireland has expressed reservations, and Luxembourg Finance Minister Pierre Gramegna has defended the right of small economies to attract businesses.
A global base tax seeks to discourage profit-shifting from one jurisdiction to another. By setting a floor on corporate tax revenue, countries would no longer compete with incentives for corporate relocation.
Under this approach, companies transferring profits abroad would face a “top-up” tax equal to the difference between the global minimum and any country’s corporate tax burden. Likewise, countries that reject the baseline would face de facto sanctions such as tax-deduction denials for companies on income earned there.
The Organization for Economic Development and Co-operation (OECD) has estimated that a base rate of 12.5 per cent would be enough to provide significant gains to countries of all income levels. Moreover, despite reporting and enforcement remaining a tricky challenge, the OECD has argued a global corporate tax would provide transparency on business practices.
Practitioners disagree. For Christian Frey, deputy head of finance and taxes at the Swiss business lobby Économiesuisse, a corporate minimum won’t close tax loopholes among countries. Instead, companies will double efforts and eventually find a way to keep profits from reaching government coffers.
“The competition for high value-added activities will continue anyway – maybe just not via the instrument of taxation but by other means. You won’t be able to prevent it,” Frey said.
The argument behind a global tax base is that companies, especially those in the digital economy, are shifting profits to tax havens. In response, countries are constantly competing for corporate investment with attractive tax regimes and other business-friendly policies.
As a result, the world average corporate tax rate has steadily declined over the past 40 years. From an average statutory corporate tax rate of 40 per cent in 1980, it fell to 24 per cent by 2020.
In the same period, the evolving forces of globalization and digitization have driven a structural change in the global economy and enabled new manufacturing techniques, namely 3D printing and factory automation. Further, a large and growing portion of international trade is composed of services, royalties and licensing fees.
According to the McKinsey Global Institute, cross-border data flows passed from almost nothing in 2005 to more than 1,400 terabytes per second in 2017. In the same vein, the S&P 500 Foreign Revenue Exposure Index more than doubled in the last decade, showing that companies are now more multinational than ever.
There’s nothing wrong with that. Human interactions are dynamic, as are the ways companies engage with one another throughout the world. Indeed, such dynamics are a driving force to prosperity.
Economies are maturing, and producers are constantly finding more convenient trade alternatives. The same applies to innovation, which is increasingly cross-border.
A global minimum corporate tax is a 20th-century solution imposed on the 21st-century economy, where the digital realm is disrupting borders and the nature of taxation. These trends have allowed companies to maximize profits and save more, leading to higher investment.
Less competition among countries means less trade, economic growth, job opportunities and wealth creation – the opposite of what the world needs amid a historic GDP slump.
If world leaders want a robust economic recovery in countries of all income levels, negotiating a global trade slowdown with harmful tax increases is not the way to go – unless, of course, their priorities lie elsewhere.
Paz Gómez is a research associate at the Frontier Centre for Public Policy.
Paz is one of our Thought Leaders. For interview requests, click here.
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