22 April, 2021
There seems to be a growing momentum around the world for a transformation of the global tax system, following US treasury secretary Janet Yellen’s comments last week, and various other developments on the international taxation front.
The development of a ‘global minimum corporate tax rate’ – in essence, setting a minimum rate for corporations all over the world to pay regardless of which jurisdiction they are registered in is a welcome idea, exposited by the arguably most important decision-maker in the world economy, secretary Yellen.
This is a move designed to tackle a worldwide phenomenon known as Base Erosion and Profit Shifting (BEPS), wherein large corporations register in low-tax jurisdictions to avoid paying higher rates of corporate tax prevalent in the countries they actually operate in. A global minimum rate would ensure that companies would have to pay wherever they were registered, with revenues being apportioned according to the extent of their activity in the respective countries.
Overall, it is estimated that corporate tax avoidance costs countries around the world $300 to $500 billion in lost revenues each year, not to mention the economist Gabriel Zucman’s estimate that, as of 2017, an accumulated $8.7 trillion of global wealth is stored in these low-tax jurisdictions (known to us more familiarly as tax havens).
The United States is planning to tackle this problem of lost revenue by measures, including inter alia, the setting of a global minimum corporate tax, reportedly at 21%. This announcement from secretary Yellen comes at a time of increasing international interest in the issue, with broad support from organisations like the G20, the OECD, and the UN FACTI Panel for a global 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 import for developing countries, stressing the loss caused by tax avoidance on the ability of developing countries to finance developmental measures.
The level at which the rate is to be set is itself is a contentious issue, and it will be one of the central points of discussion in the upcoming negotiations. Countries like Ireland, with one of the lowest corporate tax rates (12.5%) in the world, have been hesitant in signing on to the US proposal of 21%. However, as organisations like the Financial Transparency Coalition have highlighted, setting the minimum tax rate at such a low level (something the OECD has considered) would only undermine the cause of increasing tax revenue globally, and would be a Pyrrhic victory.
The FACTI Panel report had suggested a rate in the vicinity of 20 to 30%, with the Independent Commission on Reform of International Corporate Taxation (ICRICT) endorsing a minimum tax global rate of 25%. An OECD report found significant revenue gains however, even at the lower bound of 12.5%. A study by the non-partisan Tax Foundation also found that the average statutory corporate income tax rate across the world is about 23.85%, which would mean pegging it at a rate significantly lower than that may not be particularly beneficial. It also found that rates have been constantly declining since 1980, when the statutory rate was at about 40%.
Normative shifts in international taxation
The American decision, in itself, must be hailed as a significant advance in the global movement for financial transparency and tax justice. The very act of recognising tax competition as being detrimental to state revenues and people’s welfare represents a significant symbolic advance. As Janet Yellen remarked – “[A] 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 matter of digital taxation. Much of this movement towards a global minimum tax has been instigated by the mobility of capital in the digital economy and the ability of digital companies to shift productive capacities in a way that resource-dependent companies cannot. However, it does imply that tax is not on digital activities per se. That is, targeting the transactions of goods and services occurring exclusively over the internet, especially value generated by the monitoring of customers (“users”). Although the new corporate tax would undoubtedly include these companies, representing a short-term solution, it will probably not address the long-run problem of taxing the digital economy.
Therefore, the new US government’s proposals (the current dispensation being far friendlier with Big Tech than its predecessor) will probably also halt schemes that target digital companies exclusively (like the European Commission’s proposed new digital tax). Only a few weeks earlier, however, Biden had criticised the UK and the EU for their unilateral ‘digital levies’ and had threatened retaliatory tariffs on their products.
The EU, in fact, has said that it will go on to implement the digital levy regardless of the OECD’s rules on minimum taxation, although the American commandeering of the project’s leadership will test the EU’s obduracy.
Indian reluctance is natural
It also remains to be seen how India will react to this new American proposal. A report suggests that the Indian government is not in favour of the new minimum tax rate – the argument being that the new proposal would not be favourable to the Indian economy or Indian businesses. Indian statutory corporate tax rates were already slashed from 30% to 22% in November 2019. The government’s overall push to increase investment by businesses in India perhaps suggests a further lowering of the rates in the offing – with an indication of things to come perhaps being the earlier reduction in the statutory rate for new manufacturing companies to 15%. Analysts fear that this could be a short-sighted approach. In fact, the 2019 rate cut led only to reduced state revenues at a time of increased need, without any concomitant upsurge in economic growth.
However, the government’s reported reluctance does raise a few important issues. Although the “race to the bottom” has been mutually detrimental to all countries’ revenues, mechanisms and policies must be enacted as well to ensure investment in developing countries. This could take the shape of the IMF’s proposed solidarity tax – a temporary surcharge on the “winners” (those who received large payouts over the last year) of the pandemic (individuals and companies alike). The US government has so far shown no great interest in this. However, the IMF itself could go much further in supporting the recovery process in developing countries (by measures including the issuance of new credit, and the remission of previous debt) – its rhetoric often covering its active role (even during the pandemic) cutting public expenditure as part of its loan requirements.
The other, related question raised is that of the future of India’s digital equalisation levy (or the “Google tax”). Taxes of this kind have been consistently criticised by the US as unfairly targeting a particular sector, and the present government seems to concur with its predecessor on this issue. The global minimum tax’s lack of clarification on the issue of digital taxation may be further dissuasion to countries like India, who are not in the stage of development so as to not differentiate between distinct sectors and industries.
Therefore, even though a lot more remains to be done to achieve parity in international financial relations and the advancement of the goals of global tax justice, the global corporate minimum tax could go a long way in the accomplishment of these aims. Countries like India should not be recalcitrant about signing on to this proposal, and should approach this idea with cautious optimism.