Global Corporate Tax Reform – A fairer system for all?

The G7 have reached a 'historic' agreement to revolutionise the global corporate tax system and drastically alter how multinationals pay taxes. 

Under the agreement, the largest multinational corporations will be subject to tax on their profits on a country-by-country basis, and a new global minimum tax rate of at least 15% would apply. This would seemingly reverse decades of corporate tax avoidance and end the era of tax havens and profit shifting.

Although the proposed reforms could bring in up to $81bn annually in additional tax revenue, organisations such as Oxfam and the Tax Justice Network question whether such proposals will bring true fairness to a historically unfair tax system. Is the deal a victory for tax fairness, or will jurisdictional wrangling and political obstruction reduce any positives?

Ending the ’race to the bottom’

For decades, economies across the globe have seen their average headline corporate tax rate plummet. According to the OECD, there has been a  reduction from a 32% average in 2000 to just over 23% in 2018 across advanced economies. With the Biden Administration spearheading the charge amongst Western economies to end the 'race to the bottom', these proposed changes to the global corporate tax  regime were given fresh impetus and eventually led to the G7 agreement.

In addition, the ongoing Coronavirus pandemic – during which millions lost employment and suffered heavy economic losses – exposed vast income inequality, as the super-rich saw their wealth increase. As governments seek to, in the words of President Biden, 'Build Back Better' from the pandemic and the costly stimulus measures, pursuing a fairer tax system has risen to the top of the global agenda.

Indeed, Joe Biden has made a fairer tax system an instrumental aspect of his legislative agenda as US President. The 'American Jobs Plan', a $2tn plan to heavily invest in American infrastructure, housing, research and development, elderly care, and plans to 'green' the economy, is expected to be funded through a US corporate tax increase (from 21% to 28%) and a large tax windfall from any global agreement on new tax rules.  As Joe Biden seeks to reassure G7 members and the global community that ‘America is back’, their leadership on the issue of corporate taxation has translated into the G7 agreement.

What are the proposed terms of the agreement? 

The two 'pillars' of the agreement focus on how and where governments can tax multinational companies. ‘Pillar One’ grants the ability for any country to levy taxes on at least 20% of profits which exceed a 10% margin for the largest and most profitable multinational enterprises. This portion of the agreement will focus on around 100 multinationals and, according to OECD estimates, it would bring between $5bn and $12bn in additional annual revenues. 

‘Pillar Two’, however, would capture up to 8,000 multinationals and could potentially end the age of tax havens and profit-shifting. This aspect of the agreement lays out a commitment to a global minimum corporate tax rate of at least 15% on a country-by-country basis and could bring in between $42bn and $70bn annually. It would also reduce 'profit shifting', whereby companies declare their profits in low-tax countries. Under the terms of Pillar Two, although countries could set whatever local corporate tax rate they want, if companies pay lower taxes in a particular country, their headquartered country could 'top-up' their taxes to the 15% minimum.

Who is set to benefit?

The major beneficiaries of the deal will be rich and developed nations, particularly the UK and the US. According to the Biden Administration, the G7 agreement could raise $495bn in additional tax revenue over a decade. This represents a significant boost to the US economy and was a particular reason for Joe Biden's insistence on completing a deal. However, this positive news is not replicated across other rich countries. 

According to multinational law firm Clifford Chance, the UK could raise between £900m and £5bn annually from the minimum corporate tax rate. But, under Pillar One, the UK would remove the Digital Services Tax it previously levied against US Big Tech firms, which was set to raise £700m annually by 2025. Big Tech firms may end up paying less under the G7 deal according to TaxWatch, who said that, based on their 2019 revenues, Amazon, eBay, Facebook, and Google would pay £232.5m less in tax than if the Digital Services Tax remained in place. 

What about poorer countries? 

The deal also holds less positive news for poorer countries, which are heavily reliant on foreign direct investment (FDI) and corporation taxes to fund their economies. In 2017, African countries raised 19% of their overall GDP from corporation tax, compared to a 9% average across OECD members. 

If the proposed reforms see the benefits apply to the headquarter countries of large companies, accompanied by a reduction in FDI as rich countries could 'top-up' tax on profits, this would harm the potential for developing nations to grow their GDP and invest in their economies and communities. 

Furthermore, with little representation around the negotiating table (low-income countries represent 22% of OECD negotiating members but make up 5% of working-party meetings), the gains under the deal are unlikely to provide a significant boost to poorer countries. Indeed, the OECD estimated that the reallocation of taxing rights in a similar deal would help raise corporate-tax revenues by only 1% in poorer countries.

Will the agreement, if passed, be truly 'revolutionary'?

Although the rhetoric from G7 finance ministers has portrayed the deal as 'historic' and a victory for tax fairness, the attempts by individual countries to gain concessions risks watering down any substantial gains from the deal. In recent weeks, the UK has pushed for the exemption of financial services from the deal, arguing that they generally have to pay the right amount of local tax in their operating jurisdictions. 

The deal also faces uncertainty over the removal of Digital Service Taxes under Pillar One of the agreement. Although the US sees this removal as a prerequisite for any deal, European countries may perhaps benefit from being reluctant to remove them. 

Furthermore, the agreement requires the US to approve changes in awarding taxing rights to foreign nations. However, this entails a 2/3 supermajority agreement in the 100-seat Senate – an unlikely prospect owing to the even split between Democrats and Republicans.

Oxfam and the Tax Justice Network have also voiced their concerns that the deal fails to go far enough in ending unfair tax rules and reducing global inequality. Alex Cobham, chief executive of the Tax Justice Network, told the BBC that the deal represented a "turning point" but said it remained "extremely unfair". He also expressed concern that the new revenues may not be "distributed fairly around the world". 

 Finally, with low-tax nations such as Ireland, Cyprus, and Hungary already signalling potential aversion to the deal, any future agreement on corporate tax reform may be watered down significantly. This furthers the potential for poorer countries to see fewer possible gains from global corporate tax reform.

Perhaps local reforms to Capital Gains and Income tax could help countries raise their tax revenue. As the surprising ProPublica report demonstrated, the super-wealthy take considerable advantage of local tax laws. Reforming taxation on the local level combined with a global effort to stop profit shifting may see the end to corporate tax avoidance after all.