G7 leaders can crack down on global corporate taxes

The author is a professor at Columbia University and a Nobel Prize winner in economics

The economic losses caused by Covid-19 are unprecedented, and the situation would be even worse if the government did not intervene “at all costs”. However, as the world emerges from the health crisis, the question arises: who will pay?

Desperate response, Biden Administration It is clear: the richest citizens and large companies must pay a larger share.The President of the United States is planning to reverse many of the tax cuts in the Trump era, increasing the domestic corporate tax rate to between 25% and 28%, and proposed a The lowest effective tax rate in the world twenty one%. He is leading the struggle against the bottom line in corporate taxation.

It is expected that Europe will react at least as strongly. However, Biden’s proposal to impose taxes on multinational companies initially received a cold response from the governments of the European Union.

This is even more disappointing because the EU has been at the forefront of promoting a fairer global tax system for many years. Europe has been the source of most energy-driven reforms, the so-called BEPS project, which seeks to limit the transfer of profit registrations from around the world to low-tax jurisdictions. The European Union is also leading the way in opening up confidential jurisdictions and acting as a trailblazer in beneficial ownership registration to reveal the ultimate beneficiaries of shell companies.

But it is not too late for European countries to take the initiative and commit to setting ambitious global minimum effective corporate taxes. I am a member of the Independent Committee on International Corporate Tax Reform, Support 25% tax rate. Reaching at least 21%, just as the Biden administration originally proposed to apply to foreign profits of US multinational corporations, would be an important step in the right direction for companies to pay their fair share. It may generate considerable global revenue, at least equivalent to the annual underpayment of 240 billion U.S. dollars, or even as high as 640 billion U.S. dollars. A recent study.

Multinational companies have begun to fight back. However, their argument that this would hinder investment is specious. Corporate income tax is a tax levied on net profits after deducting labor and capital. A basic principle of economics is that such taxes will not hinder investment.

Although the target is still 21%, the United States has recently called for a global minimum 15% To persuade all 139 countries to negotiate under the Convention OECD’s “Inclusive Framework” Agree to this rate. These include countries like Ireland, which have so far been reluctant to face the reality that the world can no longer tolerate tax havens. The international community seems inclined to reach this consensus-better than the 12.5% ??promoted by these companies a year ago, but not much.

This is where global leadership is needed. The finance ministers of the Group of Seven nations met in London on Friday. This is an opportunity for major European economies to strike a historic blow to the tax avoidance of multinational companies.

Major European countries must first work with the United States to persuade other countries negotiating under the OECD framework to adopt at least a 15% lower limit. If the result is not a significant increase in tax revenue, this should be accompanied by promises to close loopholes and raise tax rates.

The concern is that the global minimum standard will become a global standard, and reforms aimed at ensuring that multinational companies pay a fair share will eventually backfire. Developing countries that rely relatively more on corporate taxes as a source of government revenue will become the biggest losers, as will SMEs in developed countries, which will still pay the local tax rate in full.

The most important thing is that, like the United States, major European countries and other countries have made more ambitious commitments to go beyond this global minimum. This is crucial. The 21% minimum tax rate adopted by the G7 (and the G20 this summer), combined with the minimum tax rate of at least 15% generally adopted by other countries, will ensure that most of the world’s corporate profits will help provide what we urgently need to escape from the pandemic Income.

The leaders of the G7 can both become a force for change and consolidate the status quo. The United States made the right move. Now it is Europe’s turn to take its responsibilities seriously and ensure that the winners of globalization contribute to the well-being of future generations.

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