G20 can improve the “one-sided” global tax reform

the author is Chief Executive Officer of Tax Justice Network

After the G7 finance ministers made compelling commitments to major international tax reforms last weekend, the agreement looks less clear.Follow-up measures to opt-out-hope from the UK For financial services to China’s concerns Its special economic zone-seen by some as a threat to the initiative. But this kind of competition is absolutely necessary-even positive.

These are probably the biggest reforms of international taxation rules in a century. They may generate more than one trillion dollars in additional revenue. Political participation at the national and international levels is essential to obtain fair results and ensure that all parties make commitments.

The process of reforming international tax rules in the OECD has been running since January 2019 and may end at the G20 meeting in October. But the latter’s July meeting was crucial to agree on the scope and ambitions of the new corporate taxation rights (the “pillar” of reform) and the scope and goals of the global minimum tax base and tax rate (“pillar two”). “).

Both have the same question: how big is the extra income, and who will receive it? To what extent will the domestic policies of various countries be restricted and at what price?

The first pillar is relatively small, but politically prominent. The public’s outrage over failing to tax multinational companies has focused on large technology companies that can outperform higher-tax local companies. The proposal of the G24 Group of Low-Income Countries and the African Tax Management Forum envisages the distribution of all global profits based on the location of the business activities of multinational companies.

However, the OECD has significantly reduced this scope, while the G7 has further reduced the scope. Now only 100 multinational companies may be affected, and only a small portion of profits with a profit margin of more than 10% will be allocated to their sales jurisdiction (there is no weight for the jurisdiction where the employment occurs). The OECD estimates that this will bring in additional revenue of US$5 billion to US$12 billion per year, a reduction of 2-5% from the estimated annual loss of US$245 billion due to profit transfers.

The benefits of the second pillar are much greater.The OECD estimates that the global minimum tax rate of 12.5% ??(applicable to approximately 8,000 multinational companies) may generate nearly $100 billion One year’s extra income. Our estimate Shows that a minimum interest rate of 15% can raise as much as $275 billion per year. 21% or 25% supported by the Biden government Respected Proposed by the Independent Commission on International Corporate Tax Reform, it will raise more.

The OECD approach confers national privileges on the headquarters. This means that if a French multinational company benefits from the 0% tax rate of transferring profits from Brazil to Bermuda, then France can “make up” the tax on the profits to 15%. Since most of the largest multinational companies are headquartered in OECD countries, most of the revenue will go to them. G7 members, which account for 10% of the world’s population, will receive more than 60% of additional income.

The alternative proposed by the Tax Justice Network, the minimum effective tax rate (METR), will allocate untaxed profits based on the location of the actual activities of the multinational company. They will be taxed at the overall national tax rate, rather than at the lowest agreed global tax rate, in order to avoid stimulating profit shifts. The 15% interest rate will add up to $460 billion in additional revenue. For the main G20 members outside of G7, the difference is obvious. At a rate of 15%, India may receive 13 billion U.S. dollars instead of 4 billion U.S. dollars; and China will receive 72 billion U.S. dollars instead of 32 billion U.S. dollars. The additional income of countries such as Brazil and South Africa will double or even triple.

Like China, many countries worry that the benefits of reducing tax abuse may offset their ability to provide companies with incentives to find actual activities. If the OECD insists on granting national privileges to its headquarters, this is impossible. Other countries, such as the United Kingdom, want to protect “their” multinational companies-but competition loopholes can undermine the benefits of cooperation.

The global minimum tax poses a serious threat to the business model of many jurisdictions-for example, Ireland, which has an average effective tax rate for U.S. multinational corporations Just 2 percentage. But this model is anti-social and unsustainable.

There is a big deal to be concluded. Fundamentally, the reform aims to renew fiscal sovereignty by strengthening cooperation. This requires negotiations to be globally inclusive and transparent, which indicates that future tax reforms should be carried out under the auspices of the United Nations. At the same time, G20 members have the opportunity to improve the unilateral agreement proposed by a group of rich countries and lay the foundation for a better agreement.

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