There appears to be growing momentum around the world for a transformation of the global tax system, following US Treasury Secretary Janet Yellen comments last week, and various other developments on the international tax front.
The development of a “ global minimum corporate tax rate ” – in essence, setting a minimum rate that companies around the world must pay regardless of the jurisdiction in which they are registered is a welcome idea, outlined by arguably the most important decision-maker in the global economy, Secretary Yellen.
This is an initiative designed to tackle a global phenomenon known as Base Erosion and Profit Shifting (BEPS), in which large companies are operating in low-income jurisdictions. tax rate to avoid paying higher corporate tax rates in the countries where they actually operate. A global minimum rate would allow companies to pay wherever they are registered, with revenues being distributed according to the extent of their activity in the respective countries.
All in all, it is valued that corporate tax evasion costs countries around the world $ 300 billion to $ 500 billion in lost revenue every year, not to mention economist Gabriel Zucman’s estimate that in 2017, $ 8.7 trillion in accumulated global wealth was stored in these low-tax jurisdictions (which we know more colloquially as tax heavens).
The United States is Planning tackle this problem of loss of income through measures, in particular among others, the fixing of a global minimum tax on companies, which would be 21%. Secretary Yellen’s announcement comes at a time when the international community is increasingly interested in the issue, with broad support from organizations like the G20, the OECD, and the UN FACTI Panel for an overall minimum tax rate. The UN FACTI Panel (or the High Level Panel on International Financial Accountability, Transparency and Integrity for Achieving the 2030 Agenda) is a document of particular importance to developing countries, highlighting the loss caused by tax evasion on the ability of developing countries to finance development measures.
The level at which the rate is to be set is itself a contentious issue, and it will be one of the central points of discussion in the negotiations to come. Countries like Ireland, with one of the lowest corporate tax rates (12.5%) in the world, have been hesitant by signing the US 21% proposal. However, as organizations like the Financial Transparency Coalition have Highlighted, setting the minimum tax rate so low (which the OECD has envisioned) would only undermine the cause of rising tax revenues globally and be a Pyrrhic victory.
The FACTI Panel report had suggested a rate of around 20-30%, with the Independent Commission on the Reform of International Corporate Taxation (ICRICT) approving an overall minimum tax rate of 25%. An OECD report however, found significant earnings gains, even at the lower limit of 12.5%. A study by the Non-Partisan Tax Foundation also found that the average statutory corporate tax rate around the world is around 23.85%, which would mean that it would not be particularly beneficial to set it at a significantly lower rate. to this one. He also found that rates have been falling steadily since 1980, when the legal rate was around 40%.
Normative evolution of international taxation
The American decision, in itself, must be greeted as a significant step forward in the global movement for financial transparency and tax justice. The very fact of recognizing that tax competition is detrimental to state revenues and the well-being of the population is a significant symbolic step forward. As Janet Yellen noted – â[A] The consequence of an interconnected world has been a 30-year race to the bottom on corporate tax rates. “
An important question also arises as to how this global minimum tax affects the interrelated issue of digital taxation. Much of this move towards a global minimum tax has been sparked by the mobility of capital in the digital economy and the ability of digital businesses to shift production capacity in ways that resource-dependent businesses cannot. However, this means that the tax is not digital activities in itself. That is to say, targeting transactions of goods and services carried out exclusively on the Internet, in particular the value generated by the follow-up of customers (âusersâ). While the new corporate tax would undoubtedly include these businesses, which is a short-term solution, it is unlikely to solve the long-term problem of taxing the digital economy.
Consequently, the proposals of the new American government (the current exemption being far more sympathetic with Big Tech than its predecessor) will likely end programs that exclusively target digital businesses (like the European Commission offers new digital tax). Only a few weeks earlier, however, Biden had criticized the UK and the EU for their unilateral “ digital withdrawals ” and had threat retaliatory tariffs on their products.
The EU, in fact, has said it will continue to implement the digital tax regardless of OECD rules on minimum taxation, although the US requisition of project leadership will test stubbornness. of the EU.
Indian reluctance is natural
It also remains to be seen how India reacts to this new US proposal. A report suggests that the Indian government is not in favor of the new minimum tax rate – the argument being that the new proposal would not be favorable to the Indian economy or Indian businesses. Indian statutory tax rates were already sharp from 30% to 22% in November 2019. The government’s overall push to increase business investment in India perhaps suggests another rate cut to come – with an indication of things to come perhaps being the earlier cut in the rate. legal rate for new manufacturing companies at 15%. Analysts fear this may be a short-sighted approach. In fact, the 2019 rate cut only led to reduction in state revenues at a time of heightened needs, without any concomitant recovery in economic growth.
However, the reluctance reported by the government raises some important issues. Although the ârace to the bottomâ has been mutually detrimental to the incomes of all countries, mechanisms and policies must also be adopted to secure investments in developing countries. It could take the form of the IMF solidarity proposal tax – a temporary surtax on the âwinnersâ (those who have received large payments in the past year) of the pandemic (individuals and businesses). The US government has so far shown no great interest in this regard. However, the IMF itself could go a long way further supporting the recovery process in developing countries (through measures including issuing new credit and forgiving past debt) – its rhetoric often covering its active role (even during pandemic) by reducing public spending on its lending needs.
The other related question raised is that of the future of India’s digital equalization tax (or “Google tax”). The United States has consistently criticized such taxes as unfairly targeting a particular sector, and the current government seems to agree with its predecessor on this issue. The lack of clarification of the global minimum tax on the issue of digital taxation may be an additional deterrent for countries like India, which are not in the development stage so as not to distinguish between sectors and sectors. separate industries.
Therefore, while much remains to be done to achieve parity in international financial relations and to advance the goals of global tax justice, the global minimum corporate tax could go a long way toward achieving these goals. Goals. Countries like India should not be reluctant to sign this proposal and should approach the idea with cautious optimism.
Madhav Ramachandran works with the Center for Budget and Governance Accountability, and can be contacted at [email protected]