By: José Antonio Ocampo, a Professor at Columbia University, and Chair of the Independent Commission for the Reform of International Corporate Taxation (ICRICT). He is also former Finance Minister of Colombia and Executive Secretary of the UN Economic Commission for Latin America and the Caribbean (ECLAC).
In most developing countries, we have learned not to have too many expectations when a new tenant is installed in the White House. However, we should applaud the good initiatives of the new administration, such as the decision earlier this month to back waivers on COVID-19 vaccine patents so that they can be produced in other countries. But that is not all. Joe Biden may also be on the verge of profoundly changing development funding, by tackling an issue he was not expected to address: taxation.
To finance a US $1,900 billion recovery plan, Washington wants to look for the funds where they are: in the bank accounts of the wealthiest and of multinationals. To this end, the new administration wants, among other measures, a minimum corporate tax rate of 21% on the profits of companies abroad. This means that, for example, subsidiaries of US multinationals established in Ireland, where the rate is 12.5%, will immediately pay an additional 8.5% in taxes to the tax authorities in their home country.
This is, of course, a unilateral decision, but it is also a great opportunity for the rest of the world. In fact, the introduction of a global minimum tax is one of the main recommendations of the Report on Financial Integrity for Sustainable Development - presented last February by a United Nations high-level panel, the FACTI - of which I am a member. If endorsed by US Congress, and followed by a significant number of countries, the Biden administration’s proposals would be the biggest shake-up in corporate taxation in decades. Multinationals would no longer have an incentive to disguise their practices by artificially concentrating their profits in low- or no-tax jurisdictions. Rather, it would effectively be the end of the tax haven business model.
This is why most countries should support the US ambition, which revives the possibilities both of reaching a global agreement and of putting an end to the devastating race to the bottom in corporate taxation that we have been witnessing since the 1980s, which fuels inequality to extreme levels. We cannot give in to the blackmail of big business, which repeats that this 21% rate would be excessive and would harm developing countries, depriving them of a valuable tool for attracting investment.
This argument, which was very bizarrely taken up by the President of the World Bank himself, is completely wrong. Studies show that when a multinational company considers where to locate a production unit, tax advantage does not take pride of place at all on the list of criteria to be considered. In fact, it appears well behind other issues such as the quality of infrastructure, the education of workers, or legal security. Moreover, developing countries are the first to lose out in this growing tax competition, as their budgets are proportionally more dependent on corporate tax revenues than those of wealthier nations.
At the Independent Commission for the Reform of International Corporate Taxation (ICRICT), which I chair, along with such economists as Joseph Stiglitz, Thomas Piketty, Gabriel Zucman and Jayati Ghosh, we believe that the minimum tax rate should be 25% worldwide. While in the OECD negotiations the final rate might well be agreed between 15-21% following the latest proposal by US administration, it is crucial that countries that want to protect their tax base choose a national minimum tax rate close to 21%, as this could generate significant revenues globally, at least equal to the $240 billion annual losses estimated by the OECD. It could even reach $640 billion, according to a recent study on the potential revenue-raising effects of the widespread adoption of this measure.
In Asia, where the average corporate tax rate is 21%, but where many tax incentives are given to multinationals which reduce the effective rate up to 0%, countries should follow the US lead and introduce a global minimum tax of 15% or more, which will ensure significant revenue will be generated.
However, it is imperative that the additional revenue generated by a global minimum tax be shared equitably between the home countries of multinational companies, such as the United States, and the developing countries where the activities – workforce and raw materials – are sourced. We want multinationals to pay their fair share, but that also needs to happen everywhere, not just in the US and other rich countries. This is why the Intergovernmental Group of 24 (G24), a body representing emerging economies such as India, is requesting that, in some circumstances, these economies should have priority in taxing profits shifted to tax havens.
Consider this example. Suppose a US multinational has activities in Indonesia, but declares its profits in Singapore, where taxes are extremely low. With the system that the Biden administration wants to introduce, the tax authorities should be able to recover the difference between the rate in Singapore and 21%. In this case, the G24 wants Indonesia to take priority in taxing these profits declared in Singapore, and for the US not to apply this minimum tax. That way, Indonesia, the emerging economy where the multinational’s activities actually take place, would get its fair share of taxes paid before any other countries.
To achieve this, it is obviously desirable to reach a global agreement. However, in order to obtain an equitable distribution of resources, it would be enough for a coalition of countries to show their willingness to do so. Mobilizing the G20 countries - the world's top twenty powers - would change the whole picture, as they account for more than 90 per cent of global corporate tax revenues. In particular, it is imperative that Asian countries get involved; so far, they have been remarkably silent.
This would be a strong political gesture, but it can no longer be postponed. The COVID-19 pandemic has caused the worst sanitary, economic, and social crisis in a century. We cannot miss the opportunity to respond to this challenge by rebuilding societies that are not only more prosperous, but also more just and equitable.*)
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