A single global corporate tax - how realistic is it?
In the 80-90s of the last century, there was an active offshoring of the world economy. Numerous "tax havens" were created in which multi-national corporations (MNCs) could hide their profits, thus evading the payment of high corporate taxes that operated in economically developed countries.
In addition to the so-called "black" offshore jurisdictions (such as the Bahamas or Panama), where tax rates were zero or almost zero, there were so-called "grey" offshore companies (for example, the Netherlands), where rates were much lower than, say, in the United States, Germany or France.
Since the end of the last century, attempts have been made at the international level to counteract MNC tax evasion - first and foremost, within the framework of the Organisation for Economic Cooperation and Development (OECD). One of the important documents developed within the framework of the OECD was the convention "On the Automatic exchange of Tax Information".
To date, almost 100 countries have become parties to the convention, including Russia. It has become much more difficult for businesses to avoid paying taxes today. Although there are still many "quiet backwaters" - various jurisdictions that have not signed the convention and continue to remain "tax havens".
Another area of activity of the OECD in bringing order to taxes is the preparation of countries for the adoption of a single minimum corporate income tax rate. Even economically developed countries have become involved in a competitive struggle for attracting MNCs and foreign capital, which, of course, undermines public finances. The trend of reducing the average corporate tax rate in the world has been observed for decades, writes Bloomberg: in the early 1980s, the rate exceeded 40%, by 2020 it fell to 24%.
In the group of economically developed countries, there is a large diversity in the picture of corporate income tax rates. In the UK, it is equal to 19%, Ireland - 12.5%, in Switzerland - 14.9% (the average rate, it varies by individual cantons), in Japan - 30.6%.
In the European Union, the average rate is 24.5%. To stop the inexorable decline in tax rates, the OECD began to prepare proposals for the unification of the minimum rate in the world. Initially, most OECD member countries proposed setting such a minimum at 12.5%.
The US participated in the work on this issue, but not particularly actively. At the same time, Washington showed maximalism, offering a minimum rate of 21%, which corresponded to the actual corporate tax rate in the US. Such maximalism did not suit most countries. The "lieutenant" (USA) wanted "the whole company to keep up" with it. "Rota "(the US partners in the OECD) believed that the "lieutenant" was walking too far.
And suddenly, under the new president Joe Biden, Washington's activity to introduce a single tax rate in the world has increased dramatically. The fact is that the new administration has conceived a tax reform in the US, one of the main points of which is to increase the corporate income tax from the current level of 21% to 28%. In order to somehow move the negotiation process forward, the US and its partners met each other halfway and agreed that the minimum rate of the single world tax would be 15%.
As a result of the consensus reached, the OECD has prepared a draft reform of the global tax system, which has been agreed and approved by 130 countries of the world that provide 90% of global GDP. This was reported by many media outlets on July 1 of this year.
According to the OECD, the package of provisions, "consisting of two components, will provide the necessary support to governments that need to provide additional revenues to restore their budgets and balance sheets, investments in basic public services, infrastructure and measures necessary to help optimise the efficiency and quality of recovery after COVID”. So, the expected international agreement contains the following two components:
The first component is to prohibit the vicious practices of many MNCs: they conduct production, trade, economic and financial activities in some countries (where there are favourable conditions for the price of labor, sources of raw materials, sales markets, etc.), and they pay taxes in other countries (where tax rates are low). This dualism is especially pronounced by the largest digital corporations such as Facebook, Google, Apple, Amazon, etc.
They do their business in dozens of countries around the world, offering hundreds of millions and even billions of citizens their services, but they do not pay anything to the treasury of the countries of operational activity. A vivid example of this is the activity of digital companies in Russia. Digital corporations of Silicon Valley in Russia have so far operated without even opening their representative offices or branches. The proposed agreement provides that companies must pay taxes where they actually carry out their activities and make a profit.
As the OECD recalled, the package of documents, which was "the result of negotiations conducted under the auspices of the OECD for most of the last decade, is aimed at ensuring that multinational corporations pay taxes where they operate and make a profit."
The OECD reports that "the first component will ensure a more equitable distribution of profits and tax rights among countries in relation to the largest multinational corporations, including digital companies." "This will allow us to redistribute some tax rights in relation to these corporations from their home countries to the markets where they conduct business and make a profit." And this will be done "regardless of whether these companies are physically present there."
Many European countries and the European Union strongly insisted on the first component. For many years, they have been trying to ensure that American digital corporations pay taxes in Europe, as well as cover their huge tax arrears for previous years. It seems that the US authorities, in order to break the deadlock in negotiations on the reform of the global tax system, sided with the Europeans and agreed that Silicon Valley corporations should pay taxes in Europe.
The second component involves the movement of countries towards the unification of tax rates for corporations. Full unification will not be achieved in the near future. But to finally clean up offshore companies and zones of excessively preferential taxation is a very real goal for the near future.
"After many years of hard work and negotiations, this historic package will ensure that large multi-national corporations pay a fair share of taxes everywhere," said Mathias Cormann, Secretary General of the OECD. According to him, this package "does not eliminate tax competition, but establishes restrictions on it agreed on a multilateral basis." A minimum tax rate of 15% is intended to become such a restriction.
The total effect of the agreement on taxes, as calculated by the OECD, may amount to $250 billion. The first component can provide additional taxes in the amount of $100 billion, the second - $150 billion.
The current US Treasury Secretary Janet Yellen plays a crucial role in reaching a consensus on global tax reform. It was she who met her partners halfway, abandoning a number of tough initial positions of the American side. Commenting on the OECD's July 1 report on the positive results of negotiations on tax reform in the world, Janet Yellen said:
"For decades, the United States has participated in a doomed international tax competition, reducing our corporate tax rates only to watch other countries reduce their own in response. The result was a global race to the bottom: who can lower the corporate rate further and faster?". She concluded: "No nation has won this race."
The last contradictions between the US and its European partners were resolved at the G7 summit in June this year. The next stage, where the US will wait for the official confirmation of the agreements reached, is the G20 summit in Rome on October 30-31 this year.
We should expect that Russia will support the initiative. First, the corporate income tax rate in the Russian Federation is 20%, i.e. higher than the proposed minimum. Secondly, for Russia, the issue of American digital companies paying taxes at the place of activity, i.e. to the budget of the Russian Federation, is no less acute than for European countries.
The final revision of the tax reform plan in the world should be completed by the end of this year. 139 countries and jurisdictions participated in the negotiations on the plan. As reported in the press release of the OECD, 130 countries and jurisdictions supported it. In particular, Ireland and Hungary did not join the agreement. For them, the minimum tax rate of 15% is "excessively high".
Some experts believe that the US’ agreement to a minimum rate of 15% is a tactical device necessary in order to make the first step. 15% is just a starting point to appease low-tax jurisdictions (Ireland - 12.5%, Switzerland - 14.9 %, Singapore - about 17%) at the initial stage.
Thus, Dr. George Dibb, who heads the London Center for Economic Justice at the Institute for Public Policy Research (Center for Economic Justice at the IPPR), is confident that the US will raise the threshold rate to 25%.