US economy

G7 leaders can strike a blow on global corporate tax


The writer is a professor at Columbia University and a Nobel laureate in economics

The economic toll of Covid-19 is unprecedented, and would have been far worse if governments had not stepped in to do “whatever it takes”. But as the world emerges from the health crisis, the question arises: who foots the bill?

Against all odds, the response of the Biden administration is clear: the wealthiest citizens and big corporations must pay a larger share. The US president is planning to reverse many of the Trump-era tax cuts, raise the corporate tax rate at home to between 25 and 28 per cent and has proposed a global minimum effective tax rate of 21 per cent. He is leading the fight against the race to the bottom in corporate taxation.

One would expect at least as strong a response from Europe. However, Biden’s proposals to tax multinationals initially received a lukewarm reaction from EU governments. 

This is all the more disappointing since for years the EU has been at the forefront of pushing for a fairer global tax system. Europe has been the source of much of the energy driving reform, the so-called BEPS project, attempting to circumscribe moving the booking of profits around the world to low-tax jurisdictions. The EU has also led the way on opening up secrecy jurisdictions and acted as a trailblazer in beneficial ownership registries in order to reveal the final beneficiary of shell companies.

But it is not too late for European countries to take the initiative and commit themselves to an ambitious global minimum effective corporate tax. The Independent Commission for the Reform of International Corporate Taxation, of which I am a member, supports a 25 per cent rate. Getting to at least 21 per cent, as the Biden administration initially proposed to apply to the foreign profits of US multinationals, would be a major step in the right direction of making companies pay their fair share. It could generate significant global revenues, at least equal to the $240bn underpaid annually, but could even be as high as $640bn, according to recent research.

The multinationals are already mounting a counterattack. However, their argument that it would discourage investment is specious. Corporate income tax is a levy on pure profits, after deductions for labour and capital. A basic tenet of economics is that such taxes do not discourage investment.

While still aiming for 21 per cent, the US recently called for a global minimum of at least 15 per cent in a move to convince all 139 nations negotiating under the “inclusive framework” at the OECD to agree to such a rate. These include countries such as Ireland that have so far been reluctant to face the reality that the world can no longer tolerate tax havens. The international community seems to be gravitating toward this consensus — better than the 12.5 per cent that the companies were pushing a year ago, but not much.

This is where global leadership is required. Finance ministers from the G7 countries meet in London on Friday. That is an opportunity for the leading European economies to strike a historic blow against tax avoidance by multinationals.

The major European countries must first join the US in convincing the other states negotiating under the OECD framework to adopt a floor of at least 15 per cent. This should be accompanied by a commitment to close loopholes and to revise the rate up if the result is not a significant increase in tax revenues.

The fear is that the global minimum will turn out to be the global standard, and a reform that was intended to make sure multinationals pay their fair share will end up doing just the opposite. Developing countries, which rely relatively more on corporate tax income as a source of government revenues, would be among the big losers, as would small and medium-sized enterprises in developed countries, which will still pay the full local rate.

Above all, it is crucial that nations such as the major European countries make a more ambitious commitment, as the US is doing, to go beyond this global minimum. A 21 per cent minimum tax adopted by the G7 (and, even better, by the G20 this summer), combined with a widespread adoption of a minimum of at least 15 per cent by other countries, would ensure that the vast majority of the world’s corporate profits help provide the revenues that are desperately needed as we emerge from the pandemic.

The leaders of the G7 can either be a force for change or they can reinforce the status quo. The US has made the right move. Now it is Europe’s turn to take its responsibilities seriously and ensure the winners from globalisation contribute to the wellbeing of future generations.



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