FOUR WEEKS ago the finance ministers of the G7 countries, meeting in London, trumpeted that they had sealed a “historic” and “global” deal to reform the taxation of multinational companies and thus to curb tax avoidance. In fact, that was just the precursor to an agreement struck on July 1st, after fraught negotiations in the virtual realm involving 130 jurisdictions. Though the talks were held under the auspices of the OECD, an economic club of mainly rich countries, the deal has been agreed to by rich and poor alike.
Officials signed up to a five-page statement with two main elements: a new minimum tax rate on multinationals’ profits; and a reallocation of the right to tax those of the largest, away from places where they register their assets and towards where they make their sales. In return for those new tax rights, governments would refrain from some unilateral measures, notably taxes on giant technology companies. Securing agreement from so many countries on such a touchy issue is a remarkable feat. Even so, there is more work to do before the future of corporate taxation is settled.
For years negotiators have been trying to close the gap between the places where multinationals do business and where they book profits. As the global economy has digitised, the gap has widened—for example, as firms have registered intangible assets in tax havens and reported profits there. A study published by the IMF in 2018 found that a decrease of a percentage point in a country’s corporate-tax rate raised pre-tax profit reported there by 1.5%. The effect has increased over time. In the chase for these flighty profits, tax rates have been slashed.
Now governments have had enough. The proposed minimum tax of at least 15% would reduce companies’ incentives to game the system, by reducing the gains from siphoning away profits to havens. The reallocation of taxing rights should also reduce companies’ power to play with their tax base. The location of customers is harder to manipulate than that of intangible assets like brands or algorithms.
The deal is structured to affect more companies as time goes by. At first the reallocation of taxing rights will apply to those with global turnover above €20bn ($24bn). But if all goes well, that threshold could fall to €10bn. To address the common complaint that digital companies can make profits somewhere without registering the physical presence often necessary to tax them, governments will be able to levy some tax if local revenues exceed just €1m. In small, poor countries with GDP of less than €40bn the threshold will be only €250,000.
Agreement was not quite universal. Of the 139 jurisdictions taking part in the online negotiations, nine opted out, including Ireland, Hungary and Estonia, as well as Barbados and Saint Vincent and the Grenadines. Their resistance is hardly surprising. All these low-tax places stand to lose a competitive edge as well as tax revenue. More remarkable is that havens such as Bermuda, the Cayman Islands and Jersey signed up.
Other hold-outs include Nigeria and Kenya. According to someone close to the talks, one worry is that the reallocation of taxing rights will cost them revenue, when the loss of unilateral measures is factored in. Pascal Saint-Amans of the OECD is saddened by their decision. “We have run the numbers and taking both pillars into account these countries would certainly benefit,” he says. On July 1st the African Tax Administration Forum, a club of the continent’s taxmen, issued a statement warning that “if the process is to produce an equitable outcome it will be important that developed countries do not exert political pressure on developing countries.”
Having secured a high-level agreement, negotiators have agreed on a deadline of October to settle important details. Some countries are pushing for a minimum tax rate of 15%; others want the floor to be higher. The base of profits subject to the minimum tax, the precise amount of taxing rights to be reallocated and the precise scope of unilateral measures to be withdrawn also have to be hammered out.
After that, in 2022 governments must draw up an international treaty to reallocate taxing rights, to be implemented in 2023. The deal also envisages that minimum taxes might be legislated for in 2022 and implemented in 2023, though countries could do that without waiting for a treaty. The agreement is a big step forward. But plenty of taxing work still lies ahead.
