|JUNE 07, 2021 | VIEW IN BROWSER|
G-7 nations came to a landmark corporate tax agreement over the weekend, providing momentum for ongoing OECD talks on a new global minimum rate and reviving the relevance of the G-7 ahead of a leaders summit in England later in the week.
The deal’s two pillars aim to tackle tax havens by reducing incentives for companies to “move” overseas in the first place. The first pillar establishes a 15 percent minimum global corporate tax rate, while the second allows each country to collect tax on the profits made by large multinationals within that country, rather than where the company may be headquartered.
The agreement has been sold as a way to help countries raise revenues as the COVID-19 pandemic strains resources. It’s also designed to address a decades-long race to the bottom on corporate tax rates and a simultaneous increase in companies booking profits overseas. The average global corporate tax rate was about 40 percent in 1980 and now stands at about 23 percent, according to figures compiled by the Tax Foundation. As globalization has increased, so has the amount of profit made overseas: In the 1990s, roughly 5 percent of corporate profits were made by companies outside of the country they were headquartered, that proportion jumped to roughly 18 percent in the 2010s.
As Michael Hirsh wrote in Foreign Policy last Friday, Biden’s team sees the new corporate tax plan as an indirect way of advancing his stated campaign goals of reigning in corporations and evening out the playing field for labor. “Every country is made worse off by tax competition, especially workers. … When people say they feel the system is rigged, and when you consider why we have such extreme inequality, tax is a big part of the story,” one Biden administration official told Hirsch.
Hailing the agreement as an “significant, unprecedented commitment” in a statement on Saturday, U.S. Treasury Secretary Janet Yellen said the agreement also showcased the Biden administration’s commitment to global cooperation. “I believe what you are seeing is a revival of multilateralism,” Yellen said. Along with lofty talk, the agreement also helps the United States stave off the rise of digital services taxes, which nearly half of European countries have proposed or implemented as a way to tax the (mostly American) tech giants.
Thumbs up from tech. That may be one way to explain the positive reviews from Silicon Valley. Facebook spokesman Nick Clegg said the company wants “the international tax reform process to succeed and recognize this could mean Facebook paying more tax.” José Castañeda, a Google spokesman, said those at the search giant “strongly support the work being done to update international tax rules.”
Over the first hurdle. It’s far too early for a Biden administration victory lap, however. A meeting of G-20 finance ministers in July will test the plan’s appeal to a broader group of nations. There are also the OECD negotiations themselves: Since the organization rules by consensus, a deal could be hamstrung by objections from tax havens. Finally, there is the U.S. Congress, where at least one chamber may not even be in Democratic hands by the time the issue is up for a vote.
Setting the bar. The minimum corporate rate is still too low for some. “It’s absurd for the G7 to claim it is ‘overhauling’ a broken global tax system by setting up a global minimum corporate tax rate that is similar to the soft rates charged by tax havens like Ireland, Switzerland and Singapore,” said Gabriela Bucher, the executive director of Oxfam. “They are setting the bar so low that companies can just step over it.”