A global minimum corporation tax rate: Multilateral financial policymaking for a digitalised economy
The finance ministers of the G7 countries- seven of the world’s leading industrialised economies, but not including China and Russia- met face-to-face at Lancaster House in London on 4-5 June 2021, together with the heads of the IMF, World Bank, OECD, and Eurogroup. The group agreed upon a global minimum corporation tax rate of at least 15 per cent. Their chosen rate was a compromise figure, in response to the earlier figure of 21 per cent suggested by US Treasury Secretary Janet Yellen and President Biden. Their decision does not necessarily equate to uniform corporate taxes across the world. In one possible scenario, corporations may have to pay “top-up taxes” in countries where the rates are kept lower, while the upper limits of taxation are determined country-by-country, at rates above the global minimum.
Harmonisation of corporation tax rates is meant to create a level playing field in global taxation by removing the unfair competitive advantage of low-tax or no-tax countries. These countries seek to attract corporations to relocate their headquarters or subsidiaries and to then register their intangible assets, which do not take up physical space, within their jurisdictions. Making use of loopholes in global taxation laws, the relocated corporations thereby increase their profits by spending less on their income from intangible sources, such as drug patents and royalties, on paying back tax. For example, some medium-sized European economies such as Cyprus and Ireland (12.5 per cent) currently thrive on low corporation taxes, along with other locations which do not levy corporation tax at all, such as certain British Overseas Territories (Bermuda, Cayman Islands), the Bahamas, and the United Arab Emirates. Low or no taxation creates an environment that attracts foreign investors and also encourages foreign direct investment. But low taxes by themselves are not enough to draw in capital. Ideally you also need a capable workforce, an adequate infrastructure, and reliable local institutions, such as stable legal and political systems.
Tax harmonisation has been hindered by the actions taken by giant multinational corporate big- tech service providers with a strong online presence to reduce their tax liabilities. What might be considered tax evasion is enabled by the process of shifting their corporate profits to low-tax destinations, rather than being taxed at source, in the countries where the profits are originally generated. This shifting of profits can be further encouraged by the unilateral imposition of digital services taxes by some nations.
An agreed-upon global minimum corporation tax rate is an important first step, but some critics suggest that the proposed increase in taxation is not ambitious enough in terms of the potential revenues raised. And many hurdles lie ahead. National lawmakers, such as the US Congress, will have to first back the proposals before they can be taken forward. The G20 finance ministers, due to meet in July 2021, have yet to declare their intentions. Even when global tax rules are finally agreed upon, it may take several years before they are implemented. It is good to remain optimistic for the future, but it seems too early to count upon the fruits of additional, and yet to be realised, tax revenues.
Ashis Banerjee