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Global corporate tax agreement: UN must lead implementation

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TINASHE KADUWO

THE world’s most powerful nations agreed to a sweeping overhaul of international tax rules, with officials backing a 15% global minimum tax and other changes aimed at cracking down on tax havens that have drained countries of much-needed revenue.

The Organisation for Economic Cooperation and Development (OECD), which has been leading the negotiations, said the new minimum tax rate would apply to companies with annual revenue of more than €750 million (US$866 million) and would generate around US$150 billion in additional global tax revenue per year. The OECD said four countries — Kenya, Nigeria, Pakistan and Sri Lanka — had not yet joined the agreement, but that the countries behind the accord together accounted for over 90% of the global economy.

With budgets strained after the Covid-19 crisis, many governments want more than ever to discourage multinationals from shifting profits — and tax revenues — to low-tax countries regardless of where their sales are made. Increasingly, income from intangible sources has migrated to these jurisdictions, allowing companies to avoid paying higher taxes in their traditional home countries.

Moreover, the recent “Pandora Papers” revelations have once again, after the previously leaked information on a number of offshore accounts in the “Panama Papers”, underlined the need for steps to be taken to stop money laundering and tax avoidance.

On both counts, the agreement on a minimum global tax rate is a very important step in this direction. Commenting on the agreement, Janet Yellen, who is the US Treasury secretary, reportedly called it as “a once-in-a-generation accomplishment for economic diplomacy”.

 “More than 130 countries have signed up to a ground-breaking global deal on corporate tax reform aimed at eliminating tax havens while bringing in US$150bn more a year from multinationals. …The agreement — the biggest corporate tax reform for more than a century orchestrated by the OECD — includes a 15% global minimum effective corporate tax rate, plus new rules to force the world’s multinationals to declare profits and pay more in the countries where they do business.”

“The deal further finalised the details on sharing the profits of the largest multinationals so they pay more tax where they do business. Companies with turnover exceeding €20bn will be required to allocate 25% of their profits in excess of a 10% margin to the countries where they operate, based on their sales. The 10% profitability margin will be calculated using an averaging mechanism, based on profit before tax.

Although an important step in stopping a “race to the bottom” in terms of countries attracting capital by keeping lower rates of tax previously, it would be important to raise the minimum corporate tax rate to at least 25%, to have some sort of meaningful impact in avoiding money laundering and tax avoidance. Having said that, while countries have agreed to a floor of 15%, concessions have also started to appear from certain individual countries.

So, for instance, although it is good that Ireland has signed on to the agreement, according to an article from Financial Times “Ireland succeeded in its demand for the tax to have a maximum of 15%, instead of the original wording of the deal that said ‘at least 15%’ and in contrast to the original 21% first mooted by the US’s Biden administration.” In any case, at least, Ireland through the agreement ended its policy of keeping corporate tax rate at 12.5% since 1 January 2003. Now, the next effort should be by the OECD and others, and especially the United Nations, which should play a greater role, being a greater forum in terms of membership and overall functions, to increase the floor of minimum tax to more meaningful levels, in terms of tax avoidance and stopping money laundering.

Moreover, according to the same Financial Times article, “China also succeeded in having a clause inserted that will limit the effect of the global minimum tax on companies who are starting to expand internationally– because of concerns that its growing domestic companies would be clipped by the measures.”

Generally, passing the agreement into law will be important for bigger economies such as the US, as pointed out in the New York Times article that “As the Biden Administration prepares to try to raise corporate rates in the United States, getting a global minimum tax in place has become critical to prevent companies from simply moving their headquarters overseas. … To comply with the new global minimum tax requirements, Congress will have to pass legislation raising the tax that American companies pay on foreign profits to 15%, or higher, from 10.5%.”

An article titled “Amazon had sales income of €44bn in Europe in 2020 but paid no corporation tax” published inThe Guardian in May this year indicated, for instance, that “Fresh questions have been raised over Amazon’s tax planning after its latest corporate filings in Luxembourg revealed that the company collected record sales income of €44bn (£38bn) in Europe last year but did not have to pay any corporation tax to the Grand Duchy.” Margaret Hodge, a Labour MP who has long campaigned against tax avoidance, said: “It seems that Amazon’s relentless campaign of appalling tax avoidance continues. … These big digital companies all rely on our public services, our infrastructure, and our educated and healthy workforce. But unlike smaller businesses and hard-working taxpayers, the tech giants fail to pay fairly into the common pot for the common good.”

The currently agreed upon corporate tax agreement is indeed a right step in stopping this type of tax avoidance.

While the agreement is significant in dealing with tax avoidance and deterring money laundering, a number of developing countries reportedly have reservations.

Developing countries have complained about the lack of revenue they stand to make from the deal on fairer distribution of profits and taxing rights. They point out that this is worsened by the removal of digital service taxes, which was a deal-breaker for Nigeria and Kenya despite OECD estimates showing they would gain. 

Of the 140 countries engaged in the negotiations, 136 signed on to the new outline. Holdouts were Kenya, Nigeria, Pakistan, and Sri Lanka. Companies in the extractives sector (like oil, gas, and other mining companies) and financial services companies would be excluded from the policy.

*Kaduwo is a Zimbabwean Economist

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