Imperfect global tax deal is perfect springboard
LONDON, July 1 (Reuters Breakingviews) - Just organizing a meeting of 130 people is hard. Getting that number of governments to agree on a corporate tax regime is an astonishing achievement. That makes a new deal, whose signatories account for more than 90% of world GDP, worth celebrating despite its flaws.
The Paris-based Organisation for Economic Co-operation and Development said on Thursday that all but nine of the 139 countries negotiating an overhaul of global tax rules had agreed a two-part plan. The meatiest bit is a new minimum corporate tax rate of at least 15%, an old idea that was given new life by U.S. Treasury Secretary Janet Yellen’s support in April. The countries will also divide up a portion of the biggest multinationals’ profits based on where sales are made rather than where earnings are declared.
The settlement has numerous shortcomings. At the relatively low level of 15%, the minimum tax might only eliminate the most egregious tax avoidance. The OECD reckons it would raise $150 billion for governments worldwide. That’s a fraction of the more than $500 billion to $600 billion lost to tax havens each year, based on studies collated by the International Monetary Fund. Worse, the minimum rate does little for poorer countries since it primarily helps nations where large multinationals are headquartered.
The package also includes measures to distribute revenue-raising powers more equitably between countries. It would, for example, grant France or India the right to extract more money from Facebook (FB.O). But the new powers will only reallocate $100 billion of pre-tax profit worldwide. Using the global average statutory corporate rate as calculated by the Tax Foundation, that’s equivalent to $24 billion of government revenue, or just 2% of global corporate tax receipts in 2019 based on data for 96 economies gathered by the OECD.
Yet for the first time ever, governments are grabbing back a meaningful chunk of the sums lost to tax avoidance. Holdouts like Ireland will struggle to entice the foreign giants with sweet rates. And there’s a path to improving most of the deal’s shortcomings. Yellen has pitched a 21% minimum rate on U.S. firms’ global income. Other countries could also set their level above the 15% floor. And governments are planning to reduce the revenue thresholds for the new taxing rights after seven years, reallocating more money to poorer populous nations. The plan is imperfect. But it’s the beginning, not the end, of a global tax revamp.
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CONTEXT NEWS
- The Organisation for Economic Co-operation and Development on July 1 said that 130 of 139 countries negotiating an overhaul of corporate taxation had backed plans for a minimum rate of at least 15% and a reallocation of some taxing rights over multinationals from their home countries to the markets where they generate revenue.
- A more detailed agreement will be finalised by October 2021, according to the Paris-based body that has been overseeing the talks.
- The global minimum tax rate could yield around $150 billion of additional revenue for governments each year, the OECD estimated.
- The new taxing right would initially apply to companies with more than 20 billion euros of revenue and a pre-tax profit margin of more than 10%. It could lead to $100 billion of annual pre-tax profit being reallocated between jurisdictions over time according to the OECD.
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