On June 5, the Group of Seven (G7) advanced economies secured a landmark deal on taxing multinational companies. They agreed to a global minimum corporate tax rate of at least 15 percent – coupled with the stipulation that these MNCs would be taxed where they operate, not simply where they are headquartered.

As a sign of the increasing momentum surrounding a changing global compact on taxation, various reports have come out focusing on the continuing injustices of the international tax system, along with recommendations to rectify them.  Many of these reports focus not just on the broken nature of the current tax regime, but also focus on the failures of countries’ healthcare systems in dealing with the crisis engendered by the Covid-19 pandemic.

What various reports say

A report by the UK-based NGO (another important indicator of the importance of taxation to social justice has been the proliferation of Civil society Organisations working on the topic), Church Action for Tax Justice (CATJ) -- entitled A Global Tax Plan for a Global Pandemic, focuses on plans for a new international taxation system, led by President Biden’s proposal for a Global Minimum Corporate Tax.

The report makes a simple point – if a global minimum tax of 21 percent could be agreed upon, the revenue gain from this tax could allow most developing countries to pay for the vaccination of their most vulnerable citizens, and in some cases, pay for the vaccinations of their entire populace. The report’s key advance, however, is the method of how this gain from taxation is distributed amongst countries. The minimum tax proposal, in its current form, is heavily biased towards developed countries and concentrates most of its gains in “residence countries”, where most multinational companies subject to this tax are headquartered.

This report suggests that we instead use the Minimum Effective Tax Rate (METR) method, which allows for a ‘fairer split’ of the revenues, taxing the companies based on ‘source’ countries --  that is, the country where the “economic activity actually takes place”. This would result in a far more equitable distribution of the gains from the corporate minimum tax, something developing countries have raised as a potential objection to this plan’s rollout.

A second report by the international NGO ActionAid, titled ‘Mission Recovery: How Big Tech’s Tax Bill Could Kickstart a Fairer Economy’  finds that taxes lost from the world’s five largest tech companies (Alphabet, Apple, Facebook, Microsoft, and Amazon) “could have paid for two doses of Covid vaccination for every human on Earth”.

The loss from these 5 companies is approximately US$ 1.54 bn for India alone.  The report (complementing the other one) argues that, let alone the potential revenue from a new tax, the revenue foregone by the current archaic tax rules would be enough to pay for the world’s vaccinations via the WHO’s COVAX scheme.

The report sets out concrete measures to calculate and appropriately tax the ‘digital economy’. It comes out heavily in favour not only of a corporate minimum tax, but a tax set at a 25% rate (as recommended by the Independent Commission for the Reform of International Corporate Taxation (ICRICT)). This is considerably higher than Biden’s original proposal of 21 percent, with reports now suggesting that the American administration and its co-conspirers are willing to settle for 15 percent.

However, the report is also unwilling to wait for international action on the issue, and suggests ways for countries to act unilaterally, without awaiting multilateral approval. It suggests taxes under two headings – those on profits, and those on digital transactions. The profits-based ones are a Formulary Alternative Minimum Tax (FAM Tax), a Fractional Apportionment Tax, or an Excess Profits Tax.

All of these involve calculation of the extent of ‘economic involvement’ a digital company has in a country (something that they cite India approbatively in having undertaken) and then taxing the profits made there at the stipulated level. However, as they acknowledge, this has far more potential gains for developed countries than developing, as well as being more difficult for a developing country competing for limited investment to undertake unilaterally.

The third is a report by the International Budget Partnership (IBP) – “Managing COVID Funds: The Accountability Gap”. This report focuses on the accountability measures (or lack thereof) in the fiscal policy responses of various national governments to the Covid-19 pandemic. Analysing stimulus measures in 120 countries, it found that only 4 countries had an “adequate” level of transparency, with 29 countries having “some”, 55 countries having “limited”, and 32 countries having “minimal” levels of accountability, respectively.

All of these reports, combined with the “People’s Recovery Tracker” of the Financial Transparency Coalition (FTC) launched in April, reveal the inadequacies of the economic response to the pandemic and of the global situation surrounding taxation. However, a more sanguine perspective would also acknowledge the increase in awareness around issues of taxation and transparency probably represent an advance in the global discussion.

Accounting for political context

However, the continued absence of politics from the discussion surrounding these developments remains a key problem. Admittedly, the civil society organisations mentioned want to remain non-partisan and hope that consequently, hope for a cross-political solution to the highlighted problems. However, some points about politics must be included, after all, the renewed push for increased taxation under the Biden administration in the USA would probably not have emerged under the previous dispensation. Moreover, questions of international politics need to be highlighted. For instance, the IBP report, with its undifferentiated consideration of 'transparency' across differing countries and differing contexts, have developing countries doing almost uniformly badly on these indicators.

Although that may be largely true, political corruption in developing countries is often intricately linked to practices by the companies and nations of the developed world, and to suggest an indiscriminate 'accountability' measure may not capture the complexities and minutiae of political economy. After all, although the Vietnamese and Korean responses to Covid may be less 'transparent' than the United States or the UK, the former countries’ responses were undoubtedly preferable in terms of actually protecting against the ravages of the pandemic.

The pandemic, as is repeatedly emphasised, has exposed and deepened inequities in the global economy. These inequalities have been inescapable to all but the wilfully ignorant, and these reports have tried to combine the need for increased economic justice with strengthened social welfare systems. This push to show the interconnectedness of the economic system, and that social justice is incompatible with the current international architecture of the financial system is a welcome pushback against the dominant narrative of the previous decades.

The reason for Covid vaccines not reaching the global south is not simply a matter of money, as the reports seem to suggest. It is also a question of power, with the hoarding of vaccines by developed countries, as well as skewed manufacturing capabilities, with many countries in the Global South not having sufficient industrial potential to produce the vaccines, even if they wanted to.

Additionally, the emaciation of social welfare programmes, and the continued veneration of Intellectual Property Right (IPR) shibboleths all contribute to the global imbalance of vaccine distribution. Increasing global corporate tax rates alone will remain inadequate unless they also address the questions of political contexts and international economic relations that surround them.

The G7 deal in this context

Countries that are dependent on tax-based incentives for business, such as Ireland (with a nominal corporate tax rate of 12.5 percent), are more hesitant about the new proposal. The Irish finance minister Paschal Donohoe, tweeted out, any agreement would have to "meet the needs of small and large countries, developed and developing". Although this is couched in progressive terminology, this must be contextualised by the fact that Ireland is one of the few countries to have gained economically in this ‘race-to-the-bottom’ on tax rates.

The G7 deal thus has important ramifications. The new proposals for a global minimum tax, as they stand, do not represent its most progressive iteration. As has been pointed out by the CATJ proposal, and elsewhere, the process for the implementation of this tax must ensure that the proceeds from the tax are divided more equitably; additionally, the procedure must be democratic and taken in consultation with countries around the world, not just by the G7 or the OECD. After all, opaque and exclusive decision-making is one of the ways that the global financial system has developed the way it has until now.