Corporate taxes illustrate the complexity of global policy coordination.
Following a decade of debate, over 130 nations agreed to a Global Minimum Tax for large multinational corporations (MNCs) in 2021. At the time, it was deemed a momentous achievement that would prevent a race to the bottom in corporate tax rates. Three years later, the deal is stuck in political paralysis.
The agreement contains two pillars. Pillar One changes where large corporations pay taxes. MNCs would pay taxes in jurisdictions where they conduct a substantial amount of business or where their products are sold, even if they do not have a physical presence in those markets. Pillar Two focuses on the introduction of the global minimum tax of 15% for companies with consolidated group revenues of more than €750 million per year.
The new system is aimed at minimizing opportunities for profit shifting, and ensuring that the largest corporations pay taxes both where they do business and at home. Research shows that U.S. businesses accumulated an estimated $1.2 to $1.4 trillion in profits in low-tax jurisdictions from 1998 to 2018.
A HISTORIC AGREEMENT IS AT RISK OF BECOMING ANOTHER MAJOR ECONOMIC FLASHPOINT.
EVEN IF THE U.S. DOES NOT ADOPT THE GLOBAL MINIMUM TAX, U.S. FIRMS WILL PAY MORE IN TAXES OVERSEAS.
Corporate taxes are a source of revenue for development objectives, energy transition and infrastructure modernization. The international tax reform was expected to provide a more level playing field and increase fiscal intake. According to the Organization For Economic Co-operation and Development (OECD), which led the discussions around the agreement, the global minimum tax policy will reduce under-taxed profits by around 80%. The OECD estimates that the reform would lead to an increase in annual tax revenue of up to 8.1%, or $192 billion globally.
After delays and disagreements, the draft of the multilateral treaty for Pillar One was published only recently (October 2023). The progress on Pillar Two has also been slow. Only 36 nations have implemented the deal or have new rules in process thus far. These include the U.K., Norway, Australia, South Korea, Japan and Canada. Even nations like Ireland, Luxembourg, Switzerland and Barbados, which were seen as tax havens or investment hubs, have levied the 15% minimum tax on profits of large corporations.
However, the deal continues to face obstacles in other major economies like the United States, where Congress has been unable to ratify the agreement. The loss of sovereignty and ability to cut taxes is a point of great contention; the U.S. could withdraw from the deal entirely if Republicans prevail in this year’s elections.
In January 2024, the European Commission initiated infringement proceedings against nine European Union (EU) member states for not implementing the global minimum tax. Non-compliance could lead to an escalation to the EU Court of Justice and potential financial penalties. Several developing market signatories are pushing for a bigger and legally binding role of the United Nations amid concerns over their interests.
Not every nation stands to benefit from the standardization in international taxation. Investment hubs which have had corporate tax rates below 15% or have used corporate tax breaks to attract foreign investments will be among the biggest losers, as MNCs will likely relocate profits and investments. American corporations have benefited from lower corporate tax rates in European economies like Ireland. They now face higher tax payments, even without the ratification of the deal in the United States, as many European nations have already adopted the reforms.
A U.S. opt-out will likely fragment the global tax system and could trigger trade or tariff fights. The deal will boost tax revenue for developing economies, but the gains will be relatively small and won’t be enough to meet their sustainable development goals without raising their domestic taxes.
All these developments suggest that broad implementation of the 2021 agreement is still some way off. This potential symbol of cooperation has become a source of friction in an already fragmented world.
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