Are the new global tax proposals in the interests of low- and middle-income countries? The jury is still out.
In July, 133 governments reached two high-level agreements to divide the taxable profits of multinational corporations among the signatory nations. [Read more about the proposals.]
One establishes a global minimum tax on corporate profits. In theory, that could help eliminate tax havens—countries that make it easy for multinational corporations to avoid paying their fair share of taxes. It could also address the problem of “tax competition”—the self-destructive race to the bottom that many countries engage in to try and attract foreign investment.
All good, except the governments are considering a rate of 15 percent—barely above that of some notorious tax havens like Ireland. Some countries charge more than 30 percent, so setting a rate as low as 15 will continue to stimulate tax competition and enable countries to provide safe haven for tax dodgers. (The agreement allows for an even lower rate for routine profits from bricks-and-mortar operations.)
Moreover, the global minimum tax would be collected by “home” nations (where corporations are headquartered), which are generally high-income countries. Low-income countries should consider opting out of the global minimum tax, instead imposing a unilateral tax on the multinational corporations they host.
Another agreement in the works is both revolutionary and insignificant.
Revolutionary because, for the first time, it awards taxing rights to market countries (the countries of final sale of a multinational’s goods or services). Insignificant because the deal will apply only to a small fraction of the profits of a small fraction of corporations.
An independent study estimates that only 78 corporations would be affected; by our calculation, all low-income countries together could receive as little as $140 million in annual revenue—about .03 percent of their combined GDP.
A little is better than nothing, but there is a catch: an essential part of the deal is that all signatories refrain from levying taxes on digital services.
Under current rules, countries can only tax corporations that have a physical presence within their territory. While digital services like web search (e.g., Google) and social networking (e.g., Facebook) represent a growing share of the global economy, they escape corporate taxation in market countries. Increasingly, market countries have adopted or are considering adopting digital services taxes.
But because most of the world’s large digital services corporations are headquartered in the United States, the government has taken the position that foreign digital services taxes discriminate against the US, and it has adopted a carrot-and-stick approach to prevent other countries from singling out big tech for taxation.
The carrot is this agreement, which would allow all market countries to impose corporate taxes (as opposed to digital services taxes) on the mega-corporations of all industries, including big tech. The stick is the threat of trade sanctions against countries that impose digital services taxes anyway.
Threatening trade sanctions against sovereign states that are exercising their taxing rights is bullying—a legacy of the Trump administration that President Biden has failed to repudiate.
It is incumbent on the United States to avert a trade war by proposing a deal that works for low- and middle-income countries. These countries should demand an impact assessment of the deal, including an estimate of how much revenue they would lose by forgoing a digital services tax.
The details of the agreements will likely be finalized by the end of October. In the meantime, all signs point in one direction: low- and middle-income countries should stand firm for better deals.
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