The View | How to secure a fairer tax deal for the world, not just rich countries
The recent agreement by 131 jurisdictions to reform international corporate taxation is not the end of the road. To bring about a more equitable outcome, developing countries must now push for a higher global minimum tax rate and refuse mandatory arbitration
The July 1 agreement by 131 jurisdictions to establish a global minimum tax rate of at least 15 per cent for multinational corporations (MNCs) and reallocate taxing rights is a step forward. But the deal as it stands represents another missed opportunity to deliver an equitable outcome for developing countries.
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It is good that multilateral efforts to reform global taxation are back in favour. This is largely because US President Joe Biden’s administration wants to end the race to the bottom in corporate tax rates – a contest that has benefited only tax havens. In most cases, lower tax rates not only failed to attract new investment to countries, but also deprived governments of the funds they need for social objectives and infrastructure improvements.
But the new tax deal reflects the imbalances in global power relations. G7 countries put the agreement they reached last month to the 139 countries and jurisdictions that are part of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting. Faced with a take-it-or-leave-it choice, most developing countries agreed, despite significant reservations. But a handful – including Nigeria, Kenya and Sri Lanka – did not sign up. And even some of those who did made it clear that the negotiations were not over.
Several significant issues remain. The first is that the proposed minimum tax rate of 15 per cent is too low to deter profit-shifting by MNCs. This reflects several developed countries’ preference to protect their own global firms rather than follow the lead of the United States and Argentina, which had called for a minimum tax rate of 21 per cent, and of many African countries, which proposed a 20 per cent rate.
US Treasury Secretary Janet Yellen (right) meets with German Finance Minister Olaf Scholz at the Treasury Department in Washington on July 2. The Biden administration wants to end the race to the bottom in corporate tax rates – a contest that has benefited only tax havens. Photo: Bloomberg
And for most countries in Latin America or Africa, which had average corporate tax rates of 26 per cent and 27 per cent, respectively, in 2020, a global minimum rate of around 15 per cent would do little to reduce incentives for profit-shifting. Several countries may thus unilaterally adopt a higher minimum rate.
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Furthermore, under the proposal agreed at the Organisation for Economic Cooperation and Development, most of the additional tax revenues will go to MNCs’ home countries, not to the so-called “source” countries where these companies do business and generate profits. A number of developing economies want source countries to have priority in applying the minimum tax, particularly to MNCs’ interest earnings, royalties, service payments and capital gains. The current deal would allow them to apply the minimum tax only to interest, royalties and a set of payments yet to be defined.
