Dani Rodrik

Opinion | How the G7 put tax havens on notice, rewriting the rules of hyper-globalisation

The deal for a global minimum corporate tax rate sets a low threshold to assuage developing countries’ concerns while the global apportionment of profits will enable high-tax jurisdictions to recoup some of their lost revenue

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US Treasury Secretary Janet Yellen at the G7 Finance Ministers’ Meeting in London on June 5. While the US has, in the past, been opposed to global tax harmonisation, the Biden administration has been pushing for it. Photo: AFP

Dani Rodrik

Published: 1:30am, 9 Jun 2021Updated: 2:30am, 9 Jun 2021

On June 5, the world’s leading economies announced an agreement that will bolster their ability to raise taxes on global corporations. It still needs approval from a wider set of countries, and many details need to be worked out. Nonetheless, the deal is historic.

The Group of Seven agreement has two planks. First, it proposes a global minimum tax of 15 per cent on the largest corporations. Second, a portion of these corporations’ global profits will be clawed back to countries where they do business, regardless of the location of their physical headquarters.

These objectives are a clear indication that hyper-globalisation’s rules – under which countries must compete to offer global corporations ever-sweeter deals – are being rewritten. Until very recently, it was opposition by the US that stalled global tax harmonisation. Now, it was the Biden administration that pushed the deal.

Since the race to the bottom in corporate taxation began in the 1980s, the average statutory rate has come down from nearly 50 per cent to around 24 per cent in 2020. Many countries have generous loopholes and exemptions that reduce the effective rate to single digits.

Even more damaging, global corporations have been able to shift profits to pure tax havens such as the British Virgin Islands, the Cayman Islands or Bermuda, without having to move any of their actual operations there. Estimates by Gabriel Zucman of the University of California, Berkeley, reveal that an inordinate share of US corporations’ foreign profits are booked in such tax havens, where they employ only a few people.