The Covid-19 crisis is making progress in the fight for corporate tax justice more difficult, yet more essential.
European Union countries will face tough decisions in 2022, as they clean up public finances heavily affected by the Covid-19 crisis and the deepest recession since World War II. They will need to avoid the mistake, following the global financial crisis, of self-defeating consolidation policies which were devastating for economic recovery and job growth. And there is a high road to closing the fiscal gap—via increasing revenues from multinational corporations.
A global crackdown on corporate tax dodging and avoidance would kill three birds with one stone. First, it would increase public revenues. Secondly, it would not disturb recovery, since higher tax would only be obligatory for a few multinationals, which could afford it without cutting jobs or investment. Thirdly, it would respond to the public demand for more tax justice and fairness.
The good news is that plans to reform international corporate tax rules, developed under the auspices of the Organisation for Economic Co-operation and Development, provide the perfect basis for that strategy. The bad news is that Covid-19 not only makes a political deal founded on the OECD tax plans more necessary but also more difficult.
This was reflected in the decision in mid-October by the OECD/G20 ‘Inclusive Framework’ of more than 135 countries to postpone the deadline for agreement to mid-2021. Nonetheless, failure is not an option, since there are no alternatives on the horizon.
Deriving from concern about ‘base erosion and profit shifting’ by multinationals, the OECD plans are known by the acronym BEPS 2.0. They rest on two pillars.
Pillar one tackles digital-service companies and is intended to shift taxing rights to countries in which they have markets. Currently companies are taxed where they are physically present. In the future, according to the base-case scenario of the OECD, 20 per cent of residual profits would be taxed in markets where revenues are generated, irrespective of any physical presence.
This would apply to companies with an annual turnover of more than €750 million, if they offer automated digital services (such as online platforms and ‘social media’) or are consumer-facing (such as car manufacturers). This would mean, for example, that Google would have to pay taxes in European countries, while German car-makers would have to pay taxes in the United States and elsewhere. Ultimately, it is a question of reallocating the right to tax among countries. As expected, pillar one has triggered a very heated political debate, with the US particularly concerned about the tax payments required of ‘its’ digital companies.
Pillar two introduces a minimum tax rate, along the lines of US minimum taxes (the Base Erosion Anti-abuse Tax and Global Intangible Low-Taxed Income). The OECD’s base-case scenario, a good indicator of the state of negotiations, assumes that all large corporations would have to pay at least an effective minimum tax rate of 12.5 per cent, irrespective of where they were located. There are small carve-outs but no real loopholes. The political prospects for pillar two are better because the US is on board.
Even though pillar one entails a considerable amount of profits moving into exchequers where companies have markets, the budgetary consequences are low, since taxing rights would be reallocated but not augmented. According to OECD projections, global corporate-tax revenues would only rise by 0.2-0.5 per cent.
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In contrast, pillar two would have a massive impact on the tax revenues of all countries. The base-case scenario indicates revenues would increase by $70 billion. Adding in pillar one and the minimum tax rates in the US would take that to $100 billion, a rise of about 4 per cent.
Breaking this down geographically, industrial countries would be the main beneficiaries in absolute terms. Nonetheless, developing and emerging economies would benefit most in relative gains in corporate-tax revenues.
The OECD does not foresee any negative effects on investment or employment. Higher capital costs and rising administration expenses for companies would be offset by better capital allocation (due to reduced tax competition) and greater legal certainty. If the base-case scenario were implemented, global gross domestic product would shrink by a negligible 0.1 per cent.
A no-deal scenario, on the other hand, would have devastating effects on investment and jobs, reducing global GDP by 1 per cent or more. The conflict between the US and France over the French digital-service tax provides a foretaste of the looming danger of widespread tax and trade wars.
The proposals from the OECD are far from perfect. This applies, above all, to pillar one, which increases complexity and compliance costs tremendously and should be revised in the direction of unitary taxation of companies, with a formula apportionment of revenues by country. On the other hand, the base-case scenario is a clear step in the right direction, with few alternatives available.
Relocating the negotiations to the United Nations—as some non-governmental organisations have urged—would take enormous time and make agreement even more difficult. A no-deal scenario with national tax measures would have high costs for the economy, ultimately borne by workers and employees. Progressives should aim for the best possible solution based on the OECD tax plans—especially in calling for a higher minimum tax rate.
To proceed more quickly, a possible solution would be the decoupling of the two pillars. The minimum tax is less controversial and doubly effective. It militates against tax dodging by corporations and tax competition among countries. The OECD’s impact assessment shows not much interaction between the two pillars—nothing would be lost if they were introduced separately.
The minimum tax could be the quick win necessary to give governments the breathing space they need to refresh their attempts to reform taxing rights and digital taxation more fundamentally. The #makemultinationalspay campaign tries to bring the common goal of an effective minimum tax rate to the forefront and gives European trade unions a stronger voice in the fight for tax justice and fairness.
In any event, an agreement on BEPS 2.0 would not be the end of the fight for fair business tax rules—only the beginning.
See our series of articles on Corporate Taxation in a Globalised Era
Dominik Bernhofer is an economist and head of the tax department in the Chamber of Labour, a trade union think tank in Austria; Michael Langer is an economist and research assistant there.